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5 things to remember amid the selloff: Editor’s note

Lewis Jackson  |  28 Jan 2022Text size  Decrease  Increase  |  
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I’m filling in for Emma Rapaport this week as she takes a well-earned break.

Isaac Newton discovered gravity, built the first reflecting telescope and ran the Royal Mint for almost three decades. He also lost a fortune in a stock market bubble.

Founded in 1711, the South Sea Company had a monopoly over trade with Spanish America. Shares in South Sea skyrocketed in 1720 after the company proposed to take over the national debt. Between January and August, prices rose almost tenfold. In April, with the mania intensifying, Newton sold his shares for a 100% gain, saying “I can calculate the motions of the heavenly bodies but not the madness of people.”

But as prices kept rising, he succumbed to the mania and bought back in near the top. When shares collapsed in September, he lost £20,000 (more than £4 million today).

For the rest of his life, he couldn’t bear to hear the name South Sea, records Charles Kindleberger in his Panics, Manias and Crashes: A history of financial crises.

I’ve been thinking about Newton this month as major stock markets “correct”—fall more than 10% from a previous high—for the first time since the pandemic began. As a financial journalist, friends often ask for advice, usually along the lines of “should I buy?” or “should I sell”?

Markets make fools of us all, especially when prices move in the same direction. Today’s note is a few words of counsel for those looking nervously at the sell button. The message is simple: Don’t panic.

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1. Don’t panic: They happen all the time

My copy of Manias, Panics and Crashes arrived on 6 January, the same day the S&P/ASX 200 fell 2.7% amid a selloff after the Federal Reserve surprised the market with the prospect of higher rates. The classic recounts dozens of dips, bubbles and asset price routs from the 17th century till today.


Major crashes are frequent enough to feed and clothe a cottage industry of academics. Declines of 10% or more are a dime a dozen. Yardeni Research counts 16 corrections for the S&P 500 between 2008 and 2021.

First-time pandemic investors are lucky enough to have lived through a period so bullish they coined the phrase “dip buying”. Constant growth was never going to last and there’s no reason to change a sound investment strategy based on a chance encounter with a bear.

2. Don’t panic: It can be a costly mistake

Selling along with everyone else is a bad investment strategy. Investors crystallise losses, miss out on rallies and give themselves the headache of picking the opportune moment to re-enter the market.

That hasn’t stopped many of us from trying it. I learnt this the hard way after I moved my superannuation into cash in April 2020 and missed the stock market’s biggest month in two decades.

Assuming you hold a diversified set of assets, better to let the magic of long-term returns do the work for you. Research from the Reserve Bank estimated that real (inflation-adjusted) equity market total return averaged 6% over the past century.

If you aren’t diversified, well, more on that later.

3. Don’t panic: There’s good news

Bad news for technology means bad news for US indices. Roughly a fifth of the Morningstar US Market index is made up of technology mega-caps, Tesla and Amazon. That rises to just over 40% in the Nasdaq Composite.

But as the stock market is not the economy, nor is the Nasdaq the stock market.

Take energy. The S&P 500 Energy index is extending last year’s bull run and is up 19% this year, versus a 10% decline for the wider benchmark. It’s a similar story at home. Woodside Petroleum notched a 9% increase year-to-date as the ASX/S&P 200 slipped into a correction on Thursday.

A downturn is also a chance to pick up stocks at a discount. On Wednesday, hedge fund manager Bill Ackman splashed $1.1 billion on Netflix shares, swooping on the stock after it had fallen almost 50% from its 52-week high.

Wide-moat names such as Microsoft, Intel and Adobe Systems are now trading in undervalued territory, as rated by Morningstar analysts.

4. Don’t panic: The economy is booming

Discussions amongst colleagues this week were all about wages. Journalists are experiencing a hot labour market for the first time since the internet upended newspaper business models. They’re not alone. Jobs have recovered rapidly across the developed world. The last time Australian unemployment was this low people were waving Kevin 07 signs.

Granted, major problems remain. Inflation is eroding standout wage growth in the US. Pay packets are still rising all too slowly for many Australians. But those worrying about inflation and higher interest rates should keep the strong economic recovery in mind.

A hot economy is good news for corporate profits, which should stay strong despite rising interest rates, says David Bassanese, chief economist at BetaShares.

“Growth should hold up, earnings should hold up, because interest rates should remain low and central banks will raise rates slowly,” he says.

Valuations could go a bit lower but a bear market is unlikely, he adds.

5. Maybe panic: Risk is real

Downturns are a chance to revisit your own risk capacity, which Morningstar’s Christine Benz defines as the possibility you fail to reach your financial goals. Oaktree Capital’s founder Howard Marks is blunter. He defines risk as the “possibility of permanent loss”.

Higher risk is correlated with higher reward. That tendency has calcified into an iron-clad law in the minds of some investors: take on enormous risk, weather short-term volatility (aka dips), bank millions. Stocks markets eventually go up; they say: “Look at the 20-year return.”

Thus was born the mantra popular among cryptocurrency investors: HODL - “hold on for dear life”.

But what’s sometimes true of a broad asset class (equities) over a very long period (decades) is not necessarily true of individual stocks over a person’s investment horizon. Not everything goes back up.

As Marks points out, if risky investments guaranteed high returns, they wouldn’t be risky. Permanent losses are real.

Permanent loss can come in many varieties. For every high-risk and exciting start up that becomes an Amazon, there is a Wirecard, a WeWork or any number of failed start-ups you’ve never heard of.

Then there’s prosaic declines. General Electric’s share price rose over 25,000% between 1982 and 2000. Twenty years later and shares are down more than 80% (Morningstar thinks it’s a buy today).

GE is not alone. Cisco Systems is still down off its tech-bubble peak. Computing giant IBM has steadily declined almost 30% from highs notched in 2013. Rio Tinto didn’t surpass its 2008 share price peak until last year.

Broad index investing is risky too. Japan’s benchmark Nikkei 225 has yet to clear the high notched in 1989 at the peak of the country’s asset price bubble. The Nasdaq Composite took 15 years to pass its dotcom bubble top.

So, don’t panic, but that isn’t an excuse to ignore risk. Even Isaac Newton was caught up in the “madness of people”.

Tuned out of the news this week? For those looking to catch up, we’ve got the 8 things we learned this week, from Versailles to record profits at Apple.

Central banks dominated the headlines this week. An unexpectedly high inflation reading on Tuesday has markets buzzing with speculation about how Reserve Bank Governor Philip Lowe will react. As late as December 2021, Lowe was telling markets the conditions for rate hikes were unlikely until 2023. Well, they’re here, well ahead of schedule. Peter Warnes thinks it might be just enough to get the Reserve Bank moving with rate hikes. Markets are pricing a cash rate of 1.2% by December 2022.

Federal Reserve Chairman Jerome Powell unfurled hawkish wings at a Thursday press conference, giving more details about plans for “quantitative tightening” (QT) and all but promising a rate hike in March. I wrote a short explainer for those scratching their heads at the latest acronym to spook markets.

Technology stocks have been hit hardest by Powell’s talk of higher rates. Morningstar’s chief US market strategist explains why and names a few companies looking undervalued after the selloff. Tech isn’t the only thing falling, bond markets are in decline too (sending yields higher). Tom Lauricella investigates what’s up in the world’s biggest financial market.

Geopolitics is also rattling markets. Russian troops are massed on the Ukraine border and Morningstar’s Lukas Strobl, editorial manager for Europe and the Middle East, walks through the impact on markets. Hint: Watch oil.

For those overwhelmed by the negative headlines and looking nervously at the sell button, Christine Benz has a market downturn toolkit at your disposal . In Monday’s Charts of the week, I show the enormous cost of panic selling—missing just one month of returns between 2001 and 2021 lopped a full 10% off a portfolio over 20 years.

Tired of hearing about the macroeconomy? Graham Hand deep dives into the fund industry’s dirty little secret: Boring vanilla managed funds continue to dominate the Australian market. Upstart Exchange-Traded Funds (ETFs) make up less than 4% the size of their unlisted cousins. For investors this is good news: there’s far more choice than there appears from watching ETFs roll out.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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