They say, don't try to catch a falling knife. Unfortunately, there is no rule of thumb measurement for the duration or magnitude of a falling knife - just “don't” and “catch one.”
Financial markets are one of those things that move fast and slow at the same time. Not much happens in the short-term, yet so much happens over longer periods of time. We get so caught up in and sweat the small stuff that we miss the forest for the trees.
You’ll no doubt remember the bull market rally of March, 2020 – even if you weren’t watching closely, the panic from the start of the covid crisis and the subsequent 30% drop in markets over 6 weeks was a regular feature on the news cycle for a while.
The US stock market was well and truly in bear market territory, with the Australasian markets not too far behind. If you’re struggling to remember the difference between bear and bull markets, just remember that bears run downhill. The official definition is when a market declines by more than 20% over a sustained period of time[i] – which can be frightening if you’re only looking at the immediate situation.
However, rally they did – and by the beginning of 2022, markets had rallied over +100%.
Here in NZ, KiwiSaver members had moved $1.4B into conservative and cash funds as their funds dipped in early 2020. Anyone who had a knee-jerk reaction and withdrew early had crystallized their losses. Even a few advisers got caught up in the noise, only to be caught out when the market recovered and their clients were worse off than if they had stayed their course.[ii]
Since then, the US stock market has rallied pretty hard, +20.70% for the Nasdaq and +14.15% for the S&P 500, with the Aussie market not too far behind (as usual), +5.92%.
So was that the bottom? Did the stock market price in peak inflation? Did the stock market get the recession call wrong? Did it price one in and now it's looking further ahead? Is this a recovery? Has the market got it wrong again?
What I know for sure... is that no one knows for sure.
There are so many conflicting data points in the market and economy right now. Consumer sentiment and business confidence are at all time lows, corporate earnings are at all time highs, inflation is at a multi decade high, consumer savings are are record levels, consumers are spending at record speed, employers are hiring like never before, and (depending who you listen to...) a recession is around the corner. The playbook is so obvious that it hasn't been more difficult to read the tea leaves.
This stock market rally could be a temporary comeback, and we may see new lows being tested in the months ahead. This stock market rally could stick and we may see all time highs in the months ahead too. Either won't surprise me. The optimist in me says we're climbing higher from here, but what does the market care what I think? It's nothing more than a gut feeling and confirmation bias looking back into history.
The trouble with investing is that it's counter intuitive. In other words, the time to act is when we feel crippled and paralysed, and the time to be cautious is when the stars have fully aligned. We're just not wired to think or act this way. Doing nothing should be our default when we see news about terrific highs or absymal lows – and by that, I mean staying with your long-term investment goals, not sitting in cash and waiting for pennies from heaven.
Whether the market rises or falls from here, in the long-run, it shouldn't matter. If it does, you may need to reassess the way you are allocating your capital. Investors don't get paid for not taking risk. They say don't try to catch a falling knife, yet no one tells you when the knife has hit the floor. Markets move slow and markets move fast.
The best approach is often to let the knife fall as it will, and have a plan to make the most out of the situation. This is where a trusted fiduciary can come into play by creating a financial roadmap based on evidence, and offering unbiased advice to help you get your financial house in order – regardless of what the headlines are saying about the markets.
Article created in partnership with Baharian Wealth Management. Nick Stewart is a Financial Adviser and CEO at Stewart Group, a Hawkes Bay and Wellington-based CEFEX certified financial planning and advisory firm.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
[i] https://www.investopedia.com/terms/b/bearmarket.asp
[ii] https://www.nzherald.co.nz/business/panicked-kiwisavers-moved-14-billion-at-peak-of-market-meltdown/USU6G3JKGJOFPZHKNWB3MPGVYY/
