Market Correction

  • 09 Nov 2018
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Market Correction

To outsiders, movements in financial markets can be extremely odd. Very intelligent people from other disciplines are often the worst investors of all.

Share prices fall when record profits are announced while others rise when they announce a 30% fall in profits. Markets often rise most rapidly when they are close to a significant fall and investors often feel safe when they are in the most danger.

Investing it is all about results relative to expectations. In a world with as many different moving parts as the one we live in, predictions may be presented with great confidence and what looks like very detailed, sound and logical analysis, when the truth is there is no value at all in trying to be so precise. How many updates to previously wrong predictions from the multitude of economists and strategists do we need before we take them with a grain of salt?

A “correction” is a term used in financial markets to talk about a fall in prices, but not a reversal in the general trend. We saw this in Australia which looked like it was bound to occur at some stage as quality companies were overpriced and earnings were not strong. In the US, earnings were still growing rapidly, but the increase in interest rates and ongoing trade and other conflicts meant that many investments were very sensitive to bad news or more appropriately, not super good news - i.e. results that are good, but not good enough due to other concerns.

This is common when the situation changes, investors ask more questions and are more cautious due to uncertainty. When this situation arises, markets often fall.

Uncertainty does not mean that investors feel that the situation is bad. It just means that investors are no longer sure about the story that they had been relying on.

As human beings it seems we are either confident about the future and do not think about it too much, or we are unsure and nervous.

There was no major economic developments in October, just the same old concerns of the previous month and the ones before. Fortunately markets are not overvalued as overconfidence has been much slower to develop with the memory of the GFC still fresh in the minds of many investors. While there are a range of concerns, as there almost always is, the most dangerous times for investors is when everyone believes the future is onwards and upwards.

The impact of psychology and observation that current predictions for the future are already built into the current place,  make investment markets behave in ways that many people do expect.

For further information or to discuss how we can help you, please speak to your advisor.