With the last few days being volatile in investment markets, we thought we would issue some hopefully comforting words for anyone worried about what is happening.
While everyone is captivated by the Olympic Games in Paris, admiring the incredible feats of the world’s greatest athletes, stock market investors are experiencing a different kind of performance anxiety. The global market itself is acting like an Olympian gymnast tumbling around.
The week kicked off with alarming news from Asian markets. The Japanese stock market (Nikkei) has plummeted by 12.4%, the sharpest sell-off since “Black Monday” in October 1987(1) . The South Korean market (Kospi) isn’t far behind, down 8.77%.
To add to the chaos, the VIX index, a measure of market volatility often referred to as Wall Street’s “fear gauge”, surged above 40 points from its average level of around 17%. This level of the VIX indicates a significant rise in expected market volatility and is the highest it has been since the early days of the Covid-19 pandemic. Further stoking fears, Warren Buffet’s Berkshire Hathaway sold off 50% of its stake in Apple. However, they remain Apple’s largest owner.
Markets worldwide are feeling the impact of this shock, though not all to the same degree. Chinese, Indian, and Australian markets have seen more modest declines, with China’s Hang Seng Index down 1.68%, India’s BSE SENSEX down 2.89%, and Australia’s ASX 200 down 3.7%. European markets, including the UK’s FTSE 100, opened the week with losses between 2% and 3%, relatively stable compared to the drastic falls in Japan and South Korea.
This equity downturn and increased market volatility stem from fears that the US market might slip into recession, despite major analysts still considering this scenario unlikely. Goldman Sachs estimates a 25% probability of a US recession over the next 12 months, while JP Morgan is more bearish with a 50% estimate. What we are experiencing might play out to be nothing more than short-term market paranoia(2).
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As a long-term investor, it’s crucial to remember that stock market corrections are not system failures but vital aspects of market dynamics. It might be a difficult concept to accept as anxiety levels skyrocket, but these corrections provide disciplined investors the opportunity to benefit from future gains.
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As we scroll through LinkedIn this morning, our pages are filled with this message of persistence is key.
In times of market volatility, one of the best analogies is to liken it to turbulence on a plane. Like market volatility, we are always warned that turbulence might happen and when it inevitably does happen, even though we have been warned about it, it can still be very frightening. For anyone that has chosen to ignore the captains warning to buckle up and sit tight, it can be even more frightening. But, much like investing, a flight is all about the destination and turbulence is just part of the journey.
Market volatility is part of the investing journey but it should not be a catalyst for action, and nor should it change the overall destination of your plan.
The other key message is that of, when in doubt, zoom out.
Feel free to test this out but if you jump on google (we did this on the morning of 6th of August 2024) and search S&P 500 (one of the leading US market indices), you will get a chart immediately pop up which you can toggle the timeframe on.
1 Day returns show -3.00%, 5 Day returns show -5.34% and 1 Month returns show -6.94%.
These are the returns that news outlets love to shout about as they make great news headlines but if we continue to zoom out further, 6 Month returns show +4.68%, Year to Date returns are +9.35%, 1 Year returns are +14.78% and 5 Year returns are a whopping +77.70%.
In conclusion, it’s vital to remember that history has proven to us that markets will recover. This uncertainty resembles the journey of the most decorated gymnast at the Olympics, Simone Biles. Despite flying through the air and tumbling in all directions, she always manages to land on her feet gracefully with a smile. Similarly, investors who remain patient while the market regains its footing will eventually reap significant rewards, walking away with their own string of gold medals.
And as we have done many times before, a Warren Buffet quote is always nice to finish on:
“The stock market is a device for transferring money from the impatient to the patient.”
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Sources:
Timeline Planning (1) Financial Times, 2024 (2) Reuters, 2024 |
