Tech stocks are getting thumped, a trade war is brewing and globalisation is slashing prices.
Traditional business models are being challenged, global interest rates are rising and consumers are scared of the uncertainty.
After one of the longest bull markets, investors are being jolted back to reality. We hate October, because it seems to be the most common month for share volatility.
But just like a year has four seasons in its cycles and there is night and day every 24 hours, investment markets operate in cycles as well.
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It’s a time to take a deep breath and assess your position. It’s all about perspective in times like this.
So what’s behind the sell off that started all this?
Investment markets hate surprises and they hate uncertainty. The problem is there are plenty of both.
TRUMP’S TRADE WAR
Economic history tells us protectionism is terrible for global economic growth. It stifles trade, it promotes inefficiencies and actually costs jobs rather than saves them.
Currently we have the two most powerful economies in the world, China and the US, embroiled in a tit-for-tat trade and lifting tariffs against each other, and neither is backing down.
In the past, such as lifting steel tariffs, US president Trump has played to his electoral base with grand statements to protect jobs and then quietly watered down the initiatives to something more sensible and workable later.
But with midterm US elections due next month he is holding firm on his rhetoric against China to attract votes. Hopefully, once the elections are over, he’ll return to a more rational stance.
Remember, China is America’s banker. It holds more US Government bonds than any other country so if they want to play tough it could be really ugly.
THE ERA OF CHEAP MONEY IS ENDING
Many investors have been seduced by access to credit at record low interest rates as countries have tried to recalibrate their economies in the aftermath of the Global Financial Crisis.
That meant investment assets were able to be acquired and financed cheaply. It has underpinned the growth in the global economy at a time of very low interest rates because inflation has been so low.
But as economies have recovered, interest rates are rising. The reason is that, if they stayed low, economies would overheat, inflation would rise substantially and force interest rates even higher.
It’s a real balancing act. Keep interest rates low enough for the economy to grow and create jobs, but adjust to avoid overheating.
The US economy is strong, unemployment is low and inflation is starting to creep up. So they are lifting rates.
Other countries will follow but at different times to match their individual cycles. Here in Australia, the Reserve Bank governor has said the next move in our interest rates will be up, but not until at least well into next year at the earliest.
TECH STOCK SUCCESS ATTRACTS REGULATORS
The darlings of the sharemarket, particularly in the US and to a lesser extent here in Australia, have been technology stocks.
Corporate juggernauts like Facebook, Google, Amazon and Apple have been changing the world and making fortunes for investors. For many they’ve been operating in a regulatory environment which hasn’t understood the power of these tech beasts … until now.
Government inquiries on issues like tax, data security and abuse of market power are being staged around the world which is putting a spotlight on whether these companies will face restrictions in the future.
Closer to home, the Federal Government is closely examining the amount of tax the multinationals are paying and have announced a Senate Inquiry into online lenders.
Investors in these stocks start to worry whether profitability can be maintained into the future.
DISRUPTION AND GLOBALISATION
Traditional business models and sectors are being challenged.
Look at how retail departments stores are under pressure from online shopping, or how car manufacturing has shifted offshore. Look at the plunging costs of everything from TVs to cars and international airline travel.
The world of business is changing dramatically and competition comes from all corners of the globe rather than around the corner or across the country.
That intense global competition is creating fortunes for those adjusting to the changes but also ruining those that aren’t as flexible.
For investors the challenge is backing the new winners and dumping the laggards.
WHERE TO NOW?
For those that have been caught badly by the market slide, it’s important to revisit investing fundamentals. Remember also that we faced a similar situation in February and markets recovered.
In buoyant markets and bad, many investors lose their discipline and almost become emotionally attached to rising prices or anchored to entry prices when values fall. But no matter the state of the market, it’s important to stick to your individual strategy and to bank profits and cut losses.
Unfortunately, as investors we find it incredibly easy to buy a stock but exceptionally difficult to sell it, whether that’s to make a profit or realise a loss. Most seem to marry their stocks and ride them up, then down.
But good investors take the emotion out of the process by setting rules. So if you’ve been burnt by this ‘unexpected’ dip in asset values, use it as a reminder to revisit your investing strategy.
The best strategies are always to get good advice and keep yourself well informed, but there are benefits in developing a strict investment approach using specific disciplines or formulas.
The key then is to follow the plan, however nervous or frightened you may be that the market could drop further.
Remember the last thing you want to be doing right now is making rash decisions you’ll regret later. So stop checking your online account, check-in with your adviser or broker and revisit your strategy so you can make those unbiased orders with a clear head.