Liam Dann: The sharemarket’s quiet crash and why it’s good news

OPINION:

Odds are your KiwiSaver balance is looking a bit sick right now.

No! Don’t go and check it!

At least don’t check it until you’ve read this column, which is mostly about why we shouldn’t panic and how stockmarkets always win over time.

Anyway, I can save you some time.

You’re probably down about 10 per cent – give or take and depending on what sort of fund you’re in.

If you’ve been contributing to KiwiSaver for a while, that’s likely to be thousands of dollars – which could come as a shock.

I think the slump has come as a shock to many New Zealanders.

That’s because there hasn’t really been a major stockmarket crash to grab global headlines.

When a market falls more than 5 per cent in one day, it creates a newsworthy panic that shakes the world.

The crashes of 1929 and 1987 and 2008 were dramatic enough for Hollywood to make movies about them.

They captured the imagination of the public in a way more orderly corrections don’t.

Most of the world’s major stockmarkets are already in correction territory – which means they’ve fallen 10 per cent from the most recent peak.

That’s reflected in your KiwiSaver balance.

There’s a good chance they’ll fall further before we’re through this economic cycle.

The Nasdaq index – home to all the big glamorous tech stocks – is already off more than 20 per cent. That means it now is considered to be a bear market.

It came the closest to a headline-grabbing crash on February 3 when Meta (formerly Facebook) plunged 26 per cent – the largest single company, single-day fall in history.

But remarkably the damage was contained. The wider Nasdaq was only down 3 per cent that day.

Most of the big tech stocks have been overvalued for some time.

Despite being omnipresent in our lives companies like Meta and Netflix, Zoom and Alphabet (owner of Google) don’t make enough hard profit to justify sky-high values.

Other companies that were riding pre-pandemic trends – like the shift to electric cars and alternative proteins – have also tumbled.

Tesla shares are off 31 per cent since November last year. Even Elon Musk has been selling.

Much-hyped plant proteins companies Beyond Meat and Oatly have fallen by 70 per cent and 79 per cent respectively.

In times of crisis, companies that offer promise of strong profits in the future suddenly look less attractive than those that are making real profits now.

Beyond the pandemic and the war, the underlying issue for markets is much the same as it has been for years.

Interest rates have been abnormally low since the Global Financial Crisis. That’s the way markets like it – it means money is cheap.

And that cheap money is looking for a home.

Companies can borrow to expand, investors can borrow to invest and stockmarkets look like the most attractive investment option relative to bank deposits.

Everyone in the industry has known that these conditions could not last and rates would rise.

Now its finally happening.

The US Federal Reserve lifted its rate last week for the first time since the pandemic struck. It is forecasting a further six hikes this year.

The good news is that Wall Street coped and stayed calm – for now at least.

But even if there’s no big crash, there’s also no reason to assume the bull market will be back in a hurry.

Markets could just track sideways from here, effectively losing value against inflation.

After a big fall, it can take years for a bull market to re-establish itself.

That’s okay.

Those of us staring at a deflated KiwiSaver balance can take comfort in the fact that this correction presents opportunities for the fund managers that handle our savings.

Where previously company values were inflated and expensive, there will now be undervalued firms to invest in.

That’s why all the expert advice is to hang in there and ride out the dips that markets go through.

History shows us the stockmarket always wins in the end.

Bloomberg can pull up a graph for Wall Street’s S&P 500 index that goes back 100 years and show gains of more than 60,000 per cent.

Or look at the local NZX-50 since its inception in 2001 it’s up about 544 per cent.

In the end, investment losses are just a point on a graph – unless we choose to realise them by selling.

Meanwhile, we just need to accept that the pandemic did not create wealth.

It was a net cost for the world, in the same way earthquakes and other natural disasters are costs.

Sometimes we see a strong economic rebound after a catastrophic event – like a lockdown or an earthquake.

In the midst of a rebuilding boom, it can look like the event itself has promoted growth.

Meanwhile, because modern economies run on debt, it is relatively easy to shift the time frame for paying the cost.

That means we’re often enjoying the rebound effects post-disaster before we’ve paid for it.

That was the case with the Christchurch quake and its the case with this pandemic.

The big gains we saw in shares (and property) were built on debt-fueled cash. They helped us avoid recession and market meltdowns.

They bought time to adjust to a new normal.

Paying the price is unavoidable. The best we can hope for is that we cover the bill in an orderly manner.

Source: Read Full Article