Share Market Wobbles


the beginning of a bear market or just another correction?

We have just suffered an Australian share market decline of about 10%, which qualifies as a technical correction, and as usual we have no idea if things are going to get worse before they get better. But what we do know from long experience is that eventually it gets better. A correction is a fairly normal occurrence, happening irregularly about every 18 months to 2.5 years. The latest big one we had was from about March 2015, bottoming early 2016 when the market fell about 18%, only fully recovering towards the tail-end of 2017. A smaller, about 5% slide occurred from late January this year, but by May the market had recovered completely.

The 2008 global financial crisis was an entirely different beast that caused our market to plummet by a bit more than 50%, brought about by a severe dislocation to the world economy. The current dive seems to be the consequence of no particular new macroeconomic news, i.e. not much ado about nothing much.

As usual, our share market is primarily hostage to events affecting international markets, particularly the US ones, and on this occasion, this is certainly the case. Yes, there is the old news of rising US interest rates, which long term is relatively good news for Australian companies, and then there is the trade ‘war’ between China and the US which certainly could cause difficulties to our domestic economy. Perhaps the fact that the strong growth phase in the US economy is getting long in the tooth is another worry and European concerns such as Brexit and the Italian economy troubles could develop into something more serious, but fundamentally there is nothing new suggesting that the current share market wobbles is anything but a (healthy) correction.

The sudden fall in share market prices is certainly cause for a lot of investor anxiety but it reinforces the fundamental truth that share market investment should be a long-term venture, particularly if you invest for capital gain. However, not to be forgotten in the now several years long era of low interest rates is that the market has been great, and is likely to continue to be great, for investors looking for income. It has been a fact that dividends do not fluctuate at all as much as share prices. Often dividends are totally unaffected by share price falls and our expectation is that if the current dive turns out to be a mere correction then dividends will continue to rise as they have for the last several years. Company profits both here and overseas are still rising so, so should dividends.

For investors with the capacity to invest further funds corrections normally spell opportunities. One of the famous investor Warren Buffet quotes is “Be fearful when others are greedy. Be greedy when others are fearful.”