A Correction or the Start of a Bear Market?

This week saw sharp declines in stock markets. My portfolios headed downhill consistently this week. It’s not just technology stocks that have declined but big miners also despite the fact that there have been several press articles suggesting that commodities are in a “super-cycle” and that the price of products such as copper will rise due to the inadequate supply to meet the needs of electrification required for a low carbon world. At the same time there are concerns about inflation rising with April’s consumer prices index in the USA surging by 0.8pc equivalent to an annual rate of over 4%. That may be a short-term blip but with Governments pumping cash into their economies to offset pandemic impacts, there are certainly worries that sooner or later interest rates will have to rise. If they do then the stock market may become less attractive than bonds despite an otherwise booming economy.

Is this a market “correction”, i.e. a short-term response to excessive exuberance, or the start of a bear market? Or perhaps it’s the normal “sell in May” syndrome as markets enter a quieter period during the summer as has historically been the case?

I doubt we are entering a bear market. Bear markets arise from a combination of economic circumstances and where stock market investors suffer from a deep depression about the future and head for safer havens. But there are certainly sectors of the stock market that appear to be in bubble territory and need calming down.

How this will play out is ultimately unknowable though. Predicting overall stock market trends is rather like predicting overall economic trends. Something that only fools will try to do. One can only follow the trends to see if there is a bear market developing or not. Reacting to short-term trends by selling stocks because the major indices have fallen is not likely to be a wise policy in my experience. But selling individual stocks, or a proportion of your holding, when they appear to be overpriced or in bubble territory is something worth considering.

However, moving in or out of stocks based on the vagaries of the stock market is surely the wrong approach. The prices of individual stocks are driven as much by emotion as fundamentals. Hot stocks and hot sectors can rise disproportionately because sometimes there are only buyers and no sellers as enthusiasm for their future prospects overcomes any doubts about the future risks.

The answer is surely to invest in stocks that are fundamentally sound and show all the qualities of good long-term investments, i.e. forget the short-term and look at the long-term prospects. So I won’t be selling in May because that does not match my investing style. And I will need convincing to sell at all unless I am clear that overall sentiment to a company or to the economy has changed.  

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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