Stock Market Correction:Tumbling Through the Air,Landing on Its Feet

Like an Olympian Gymnast, the Market Will Land on Its Feet

While everyone is captivated by the Olympic Games in Paris, admiring the incredible feats of the world's greatest athletes, stock market investors are experiencing a different kind of performance anxiety. The global market itself is acting like an Olympian gymnast tumbling around.

The week kicked off with alarming news from Asian markets. The Japanese stock market (Nikkei) has plummeted by 12.4%, the sharpest sell-off since “Black Monday” in October 1987*. The South Korean market (Kospi) isn't far behind, down 8.77%.

To add to the chaos, the VIX index, a measure of market volatility often referred to as Wall Street’s “fear gauge”, surged above 40 points from its average level of around 17%. This level of the VIX indicates a significant rise in expected market volatility and is the highest it has been since the early days of the Covid-19 pandemic. Further stoking fears, Warren Buffet's Berkshire Hathaway sold off 50% of its stake in Apple. However, they remain Apple’s largest owner.

Markets worldwide are feeling the impact of this shock, though not all to the same degree. Chinese, Indian, and Australian markets have seen more modest declines, with China’s Hang Seng Index down 1.68%, India's BSE SENSEX down 2.89%, and Australia’s ASX 200 down 3.7%. European markets, including the UK's FTSE 100, opened the week with losses between 2% and 3%, relatively stable compared to the drastic falls in Japan and South Korea.

This equity downturn and increased market volatility stem from fears that the US market might slip into recession, despite major analysts still considering this scenario unlikely. Goldman Sachs estimates a 25% probability of a US recession over the next 12 months, while JP Morgan is more bearish with a 50% estimate. What we are experiencing might play out to be nothing more than short-term market paranoia**.

As a long-term investor, it's crucial to remember that stock market corrections are not system failures but vital aspects of market dynamics. It might be a difficult concept to accept as anxiety levels skyrocket, but these corrections provide disciplined investors the opportunity to benefit from future gains.

The chart below illustrates the UK bull and bear markets over the last 100 years.

There are many insights to take from this chart, but the two key takeaways are:

Every bear market over the last 100 years has been followed by a much stronger bull market, elevating portfolio values to new heights.
Bear markets are inevitable parts of the market cycle. They’ve happened before and will happen again. Timing these markets is nearly impossible, and attempting to do so will likely be detrimental. This chart serves as a proactive reminder that these risks of bear markets, illustrated by the red declines, are part and parcel of the markets and necessary to reap the market’s long-term rewards.

In these turbulent times, it's worth noting that there might also be a silver lining in all this market volatility.

The current market shock, while unsettling, might prompt a beneficial response from central banks in the near future. Last week, the Bank of England (BoE) reduced rates by 25bps, a move that investors were not expecting to significantly shift the market due to this small decrease. However, the prospects of further decreases are still unclear due to relatively strong economic signals. Although UK inflation has reached the 2% target, there are fears it might rise again. The present market shock and recession fears could be the signals central banks are looking for to consider additional rate cuts, potentially bringing mortgage relief to consumers and spurring long-term global economic growth.

In conclusion, it's vital to remember that history has proven to us that markets will recover. This uncertainty resembles the journey of the most decorated gymnast at the Olympics, Simone Biles. Despite flying through the air and tumbling in all directions, she always manages to land on her feet gracefully with a smile. Similarly, investors who remain patient while the market regains its footing will eventually reap significant rewards, walking away with their own string of gold medals.

* (Financial Times, 2024)

** (Reuters, 2024)

Source: Timeline Portfolios