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Dubai: Stocks worldwide are trading deep in the red. Why? It’s primarily because a new report spurred investor fears that the US possibly made a mistake last week when it kept interest rates unchanged, and that the world’s largest economy is headed toward a recession.
Now investors believe that the US will be hesitant to cut interest rates starkly in the months to come, a move that will be tracked by global economies and affect borrowing decisions worldwide. With the US set to cut first time since 2020, and before that, in 2008, how will this affect your investment decisions?
“With stocks suffering their biggest near-term declines, investors are contemplating whether volatility of stocks globally should drive them into safe haven investments like gold or stocks or look into buying stocks that have now become cheaper,” explained Abbud Sharif, a Dubai-based investment analyst.
How changes in interest rates set by central banks can affect stock prices?
Low interest rates make some shares, like technology stocks, more appealing because of the potential for higher returns in the future. However, if interest rates rise, investors will shed expensive stocks and turn to lower-priced value stocks to get a stable return.
What are market experts advising investors to do?
The current weakness in stocks has veteran investors worried as it has nothing to do with interest rate cuts, but more to do with shock or uncertainty surrounding a sudden jolt in investor sentiments, added Sharif, who is forecasting a deeper drop in markets in the days to come.
“This is not a time to panic or sell your entire portfolio. Instead, I would advise buying good quality stocks or investment assets or funds, which have now become more reasonably valued,” said Zubair Shakeel, Abu Dhabi-based asset manager and wealth advisor.
“Be a buyer in the market now. However, there is a catch: Market advisors elsewhere and me, are advising investors to not buy stocks for the long term. The market is too expensive to build up long-term investments.”
How much worse can the current market crash get?
In investing, a correction is a decline of 10 per cent or more in the price of an asset from its most recent peak. Corrections can happen to individual assets, like an individual stock or bond, or to an index measuring a group of assets. Aside from Japan, most stocks have not dropped below 10 per cent mark.
An asset, index, or market may fall into a correction either briefly or for sustained periods – days, weeks, months, or even longer. However, the average market correction is short-lived and lasts anywhere between three and four months.
“An economy’s employment picture is a key factor that decides whether a stock market ends the year up or down. At the present sight of markets, recessionary risks are high for a large economy like the US – which is detrimental for markets worldwide. So further declines can be expected soon,” said Sharif.
What must investors do when markets are deep in the red?
“When market veterans are often asked whether or not they expect markets to rise or fall in the near future, it becomes more apparent to them that more than knowing what the stock market is going to do, it’s becomes clearer to investors on what they ought to do instead.”
Investors, new and experienced, are repeatedly recommended to do two things. First, put the market’s recent fluctuations in long-term perspective. Secondly, recognise that what kind of an investor you are matters more than which investments you own.
“The way stocks have been heaving up and down isn’t abnormal when looked at from a historical standpoint. It’s the calm of last year, when stocks rose almost 30 per cent but fluctuated with about two-thirds their usual intensity – that was considered an unusual trend,” Sharif added.
Will markets crash this time around due to recession in the US?
Not only will a correction happen, a bear market of at least a 20 per cent decline will also eventually recur. The crash of 2020 due to the onset of the global pandemic saw key indices lose 37 per cent of its value between February and March, the worst decline on record.
In fact, 2020 claims the seven worst one-day drops in market history, as well as eight of the 10 worst days. While a market crash is imminent, only time will tell as to whether markets will stay down at 10 per cent in the days to come. But Shakeel opines that this is unlikely, this time around.
Bottom line?
In what’s sometimes called “risk compensation”, you will likely drive faster down the hairpin turns of a mountain road if it has sturdy guardrails than you would if nothing stood between you and those deep ravines. The sense that the environment is safer can make you comfortable taking greater risks.
With so many of these stocks selling at hundreds of times their expected earnings, or not yet having any profits, the prospect of an end to the central banks’ easy-money policy hit hard. If central banks are ready to cut interest rates to combat runaway price increases, could all send markets tumbling again.
“Despite that, investors should not only not fear a correction or a declining market but ought to welcome one. The most obvious result of a declining market is that stocks become cheaper. That means it’s time to go shopping. Stocks that you were watching but thought too expensive, as they were carrying sky-high price valuations of their own, will now be within reach,” added Shakeel.
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