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. Photo / NZME
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. Photo / NZME
OPINION 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 inthe 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 per cent drop in markets over six weeks was a regular feature on the news cycle for a while.
The US stockmarket 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 per cent over a sustained period of time – which can be frightening if you're looking at only the immediate situation.
However, rally they did – and by the beginning of 2022, markets had rallied over +100 per cent.
Here in New Zealand, KiwiSaver members had moved $1.4 billion into conservative and cash funds as their funds dipped in early 2020. Anyone who had a knee-jerk reaction and withdrew early had crystallised their losses. Even a few advisers got swept 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.
Nick Stewart
Since then, the US stockmarket has rallied pretty hard, +20.70 per cent for the Nasdaq and +14.15 per cent for the S&P 500, with the Aussie market not too far behind as usual, +5.92%.
So was that the bottom? Did the stockmarket price in peak inflation? Did the stockmarket 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 at record levels, consumers are spending at record speed, employers are hiring like never before, and - depending on 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 stockmarket rally could be a temporary comeback, and we may see new lows being tested in the months ahead.
This stockmarket 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 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 abysmal 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 slowly 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 Hawke's 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
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