Why market volatility makes investing a spectator sport

By Peter Lynch |

Markets

As Australia begins tentative steps towards whatever the new normal is – bustling streets, booming restaurants social distancing a distant memory – many seem to have decided the pandemic is so yesterday.

It’s an incredibly dangerous presumption. There are still a lot of dark clouds on the economic horizon.

That applies whether you are an employee, an investor, a business owner or a large corporation.

Now we have accepted that the nation is officially in its first recession for three decades, we can start to look more clearly at the next few months. Few dare go beyond – either a second wave of the virus or a vaccine mean darkness or celebrations. But who knows which will eventuate?

But like taxes and death, some things are certain.

The end of the government’s largesse – JobKeeper and JobSeeker – will mean some businesses will go to the wall, and unemployment will go up.

Our soaring dollar may give us the feeling our foreign holiday is going to cheaper, but who knows when that will be? Right now, it is making our exports more costly and losing us business.

The general consensus is that September and October are going to be great months – if you’re in the company liquidation business.

Stocks and shares? Over the last three weeks, the market has surged. But that’s driven by wild expectation of a vaccine and a lot of courageous or stupid investors driven by the idea that you shouldn’t waste a good crisis.

Most forecasters are anticipating a global contraction of 5 per cent.

The Organisation of Economic Cooperation and Development, the 34 nations who try and make sense of economic movements, expects 2020 will see a 6 per cent economic downtown if the virus hits us once, or 7.2 per cent if there’s a second coronavirus outbreak.

Economics writer Allan Kohler reminds us the contraction in the Great Depression of the 1930s was 5 per cent – but the stock market fell 80 per cent.

So what’s different?

Well, Mr Kohler says: “Retail investors are piling into the market as never before, apparently because they couldn’t punt on the footy.”

And governments are pouring money into the market as never before.

And, despite our own government’s insistence they will be sticking to the script, they are unlikely to stop.

Property? Most believe the party is over – certainly for investors. Rent are low, vacancies high and many are bailing – fueling a market already losing value.

Thursday and Friday of last week saw what can happen when reports of a coronavirus second wave hit the headlines: six weeks of gains counted for nothing as $90 billion was wiped from the value of the local stock market.

A fall of three per cent in such a short period would once have had brokers running for cover. But instead, the reaction was rather peculiar.

TMS Capital portfolio manager Ben Clark told The Sydney Morning Herald: “A period of consolidation would actually be a healthy thing for the market.

“To me it had somewhat disconnected from the challenges that we’re facing and the outlook … it’s a good thing to have a bit of a regular correction on the way up.”

So volatility is the new norm. Buckle up and hope you can survive the ride.

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