The seasons of share markets
I was pondering on the current record highs of the share market (both in NZ and the USA) and I realised that the share markets basically have a lot in common with the seasons.
At the moment, here in NZ, we are sitting in a never ending winter, waiting for spring. As a friend of mine declared yesterday “The idea that spring is coming is just fake news!”
In the US and NZ share markets at present, we are sitting in an Indian Summer and wondering “when is this going to end??”
The US market is currently 8 ½ years into a bull run.
The average length of a bull run is 7 years.
It is natural to enjoy an extended run of gorgeous weather (and gorgeous investment returns) and to wish that summer would never end.
With regards to share market seasons, autumn tends to be fairly short. We seem to go from summer almost straight into winter.
Often there are signs of autumn, but they tend to be ignored.
We currently have personal bankruptcy, mortgage defaults and consumer credit back at post GFC record levels in the US. That is definitely an autumnal signal. There are leaves falling, but some people consider that the tree is unwell, not that autumn is coming.
Winter is a necessary part of the cycle of seasons.
Winter in financial markets bothers me a lot more than a weather winter season. But winter exists for a PURPOSE.
In winter, most things hibernate in the natural. They lie dormant and when spring comes, they bloom and rise covered in lovely fresh greenery to prepare for summer. The weaker and diseased plants and animals die. It is a natural cycle, and it is replicated in financial markets.
In financial markets winter, the weaker and diseased investments die. In my opinion, there are some things in the market that need to die! Unfortunately, they will take investors down with them, but they are not good for financial markets.
It is also worth noting that there are a few animals and plants that come into their own in a winter season – winter is their time to shine.
The same is true with some classes of assets, such as infrastructure investments.
It is also wise to PREPARE for winter.
Animals often stockpile food, we make hay and silage in the summer for our cows to eat over winter, and we mulch down the garden to assist it to ride through winter. In terms of preparing for our share market winter, we have been looking for investments that have an investment philosophy of being prepared for a downturn, and that also can carry large amounts of cash. Cash is like hay in the barn – it stays there and takes up space all summer, but we are pleased to have it when the frost hits.
When winter does come – and it WILL come – be prepared to hunker down and ride it out. As sure as the sun rises each morning, spring will come for those who were prepared enough and strong enough to sit through the winter.
Janet Natta is a financial adviser and director of Smart Money Advice, offering investment portfolio construction and management services to clients throughout NZ, as well as comprehensive financial planning advice to assist clients to build and protect wealth to achieve their dreams.
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