Posts Tagged ‘Investment volatility’

Investors shun Europe amid fears the Greek debt crisis will spread. Across the Atlantic, Wall Street suffers a gut-wrenching 15-minute dive because of a suspected computer snafu. What’s wrong with markets? (more…)

Given all the bad news that is coming through the media at the moment, I thought it might be useful to review ten reasons to be cheerful about the global economy and the state of investment markets:

1. An awful lot of bad news is in the price. It is the nature of markets to assimilate new information quickly, which means that as we all sit around feeling gloomy, markets have usually moved on.
2. In bad times, demand for risky assets falls. So the compensation for taking this risk needs to adjust higher to attract investors. Lower share prices relative to fundamentals just means expected returns are higher.
3. Governments in the US, Europe, the UK and Australasia are pulling out all the stops to recapitalise their banking systems and get credit flowing again. The extraordinary response of risk assets to recent moves on this front shows how important confidence is in supporting markets.
4. Central banks have mounted a globally coordinated reduction in benchmark interest rates. Markets are priced for further moves. Insofar as banks pass on these lower borrowing costs, this will support business and consumer activity, buttressing the real economy.
5. Some governments are providing fiscal stimulus to bolster economic activity. Australia, for instance, recently unveiled a $A10.4 billion package. In the US, there is talk of a post-election stimulus plan.
6. Oil prices, which until recently were seen as a major threat to global growth, have retraced significantly. From late July until early October, crude oil futures fell by 45 per cent from a record $US147.27 a barrel.
7. According to investment research, the average duration of bear markets in the US from the end of 1965 until the middle of this year was about 14 months. This one has now lasted just on a year. This is not to claim it is near an end, but the longer it goes on, the closer is the next bull market.
8. Someone is buying. It’s important to remember that on the other side of the trade from all those people liquidating their portfolios and mutual funds are other investors who are happy to buy. While some are market timers, others see this as a long-term buying opportunity.
9. Unless you have sold your holdings, your losses so far are only on paper. Market recoveries after prolonged downturns tend to come in quick sudden bursts. All you need to do to capture those recoveries is to stay in your seat.
10. The sun will come up tomorrow. Anxiety over the market downturn is understandable. But there have been crises before. The world moves on and risk appetites have a tendency to reassert themselves.

Although what we are experiencing is unprecedented with regard to the global banking system, it is interesting that some commentators are making comparisons to our market and economy from the October crash in 1987 and the recession that followed in the early 1990s. (more…)