Many investors feel share markets globally are long overdue a pull back. Many also feel that the global financial system’s issues, laid bare by the last crisis, have not since been solved.
Corrections are part of the normal ebb and flow of markets. Larger crashes like in 1987 or 2008 are relatively infrequent, though through a multi-decade lens they are inevitable.
The United States share market is currently down 5 per cent since the start of September and the New Zealand market is off 2.5 per cent. Market volatility has also risen.
Before September’s weakness, the US market was set to deliver its seventh consecutive monthly rise. Incredible.
Despite a global pandemic, the US market has doubled from its low point in March 2020 - one of the strongest 12-month gains in the last 75 years. That’s also incredible.
It’s not uncommon for September and October to be volatile months. They’ve also witnessed large falls – those in 1929, 1987 and 2008 all started in October. That fact is not, however, evidence that we’re headed for a ‘flash crash’ any time soon.
But you don’t have to look hard for bad news. Economic growth is slowing. Global supply chains are disrupted. Inflation fears are rising - not helped by higher freight charges, energy costs and wage pressures. Central banks have fewer effective tools to respond to the next crisis.
There are big risks in major economies. In the US, President Biden is struggling to get his spending plans approved. Any time a pullback happens, there’s nervousness that trend-following and algorithm-driven US traders will accelerate the fall.
In China, regulatory challenges to some business leaders have created investor uncertainty. The financial woes of Evergrande, the large Chinese property developer, are concerning.
It’s unlikely that Evergrande will be left to collapse uncontrollably, that would bring chaos to China’s economy. But how Evergrande is handled in China is about the health of its banks, financial market stability, ongoing economic growth and investor confidence for locals and those offshore.
Asset prices from property to fine art have risen, as have company valuations.
Tesla is now more valuable than the next six car companies combined. AirBNB is worth more than the bricks and mortar operations of the Marriott and Hilton combined.
Just four tech companies – Facebook, Amazon, Netflix and Google (known as the ‘FANG’ stocks) are more valuable than the entire Japanese share market.
Despite negativity and valuation questions there are positives.
Consumers continue to have capacity to spend. Huge amounts of cash are waiting to be deployed by private equity firms, global corporates and investors generally. Interest rates remain unbelievably low.
Capital expenditure by companies in the year ahead will be strong. Large sums will be invested in supply chain resilience, including spending on new technology and automation.
Let’s attempt to balance these conflicting views, and what it means for the market outlook. Are we staring at another 1987 crash or 1990s tech bubble collapse?
Right now, a near term market correction is entirely possible, but a full-on market collapse looks unlikely. For the moment, the fractured global environment remains supportive for investing.
But there are never guarantees. Investors shouldn’t forget that share market change can be like technological disruption – it can happen fast.
– John Berry is co-founder and chief executive of ethical fund manager and KiwiSaver provider Pathfinder Asset Management, the first B Corp certified fund manager in New Zealand which is part of Alvarium Wealth.
(This article was originally published by Stuff October 4, 2021) (Picture Source - Colin Ziemer/New York Stock Exchange)
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