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  )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.

It’s Not the End of the World, But It Is a Bear Market

After the Chancellor’s statement yesterday in which he did a good job of scaring everyone about the economic impact of the coronavirus epidemic, and news coverage of the spread of the virus overnight, the UK stock market was in freefall this morning. That was not helped by sharp falls in the US and Far East markets overnight.

A bear market is when folks dump shares irrespective of a company’s prospects or earnings and is driven by herd following in index funds and others. When does a bear market end?  After many months and when shares start to look very, very cheap on fundamental ratios such as earnings or dividend yields. That is clearly some way off yet.

To have that happen the public do also need to have confidence that the virus epidemic is over and that only a few old folks like me have died or are likely to die as a result. That is at least a few weeks away. But the market recovery may start to take place as soon as there is the first sign that the world is not going to end after all, which it will certainly not.

Moving into cash is one possible short-term reaction but the Bank of England have undermined that strategy by reducing interest rates to record lows. AJ Bell Youinvest have just announced that they will not be paying interest on cash in clients’ accounts any more. Other brokers (not many anyway) and banks will no doubt follow to cut their interest rates on deposits. But if there is an economic recession then holding cash, or simply spending it, is not a bad idea until the economy revives. Now is the time to cash in your shares and buy a new car or a house extension! Or for the altruists, now is the time to donate money to charity, particularly as the tax-year end is coming up.

Meanwhile the national media seem to have decided the Chancellor’s budget is an inflationary one of the spend-spend-spend variety. Why should the Government not borrow money for some required investment in infrastructure when it can borrow money at such low interest rates?

But how much influence do the Chancellor or the Governor of the Bank of England have over the real-world economy? Not a lot in essence when it is mainly driven by external factors and public sentiment.

While this plays out, I will not be dumping shares indiscriminately but I will be exiting those companies that may be particularly badly hit by the virus, if I have not already. That includes travel and holiday companies, airlines, entertainment venues, pubs and hotels, high street retail operations where footfall will decline, etc. But I may buy those companies where the share price has fallen because of the general rout when their income is not obviously threatened – for example because they have long-term contracts or guaranteed repeat business.

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

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.


© Copyright. Disclaimer: Read the About page before relying on any information in this post.