How to keep your head in markets when all around are losing theirs

published 6 December 2018

181206-nasdaq — The Nasdaq index is in correction territory

So much for the Santa rally.

The Federal Reserve has hinted at going easy. Donald Trump and China have kind of, sort of, kissed and made up. Italy the eurozone's most immediate problem appears to have dropped off everyone's big worry list.

Yet the market is tanking.

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What's going on?

What's really bothering investors?

I wrote about the yield curve on Tuesday. To cut a long story short, long-term bond yields are falling more rapidly than short-term ones, and this is often a warning sign that a recession is headed our way (although maybe not for up to two years).

We're not quite "inverted" yet (which is the key signal) but we're not far off it.

This does seem to have rattled markets badly. US markets were closed yesterday to pay their respects to George Bush senior, but they had a pretty brutal day on Tuesday.

The Dow Jones fell by 3.1%. That's a pretty chunky fall (although it's not as bad as some are making out certain news outlets insist on expressing the fall in terms of points, which makes no sense at all. The Dow losing 800 points from a starting position of 10,000 is an entirely different proposition to losing 800 points from a starting point of nearly 26,000).

The S&P 500 the more important index of the two, really fell by 3.2%. Meanwhile the tech-heavy Nasdaq has now fallen by more than 10% from its last peak, so it's in "correction" territory.

Also, looking at the futures market, it's not pretty out there traders are betting that the US market will open a lot lower again when trading starts this afternoon (UK time).

You can look at a lot of things and point to them as being catalysts. The current one is the news that Meng Wanzhou, chief financial officer of Chinese telecoms group Huawei, has been arrested in Canada, and faces extradition to the US. Reports suggest that it has something to do with violating sanctions against Iran, although none of this is clear yet.

That has markets feeling doubtful about the success of the whole Argentinian trade deal.

But really this is just a story to hang the latest market decline on. The reality is that this whole year has been about the fact that monetary policy is getting tighter. And as the year has gone on, the market has steadily lost confidence that this can just be shrugged off.

The steady march towards an inverted yield curve is just the most obvious indicator of this.

How to keep your head in a panicky market

What does this mean for you as an investor?

None of us can predict what's going to happen to markets in the short term. In the longer run, you can make a loose guess based on how expensive markets are when you buy them, but even that is a tricky business.

Your overall plan should be to favour cheap markets, avoid or "underweight" expensive ones, and save regularly towards whichever long-term financial goals you have decided on (and there really are only a few that are long-term enough to justify investment in stocks retirement being the main one).

And in the course of executing that plan, you have to expect that sometimes you're going to run into stormy weather. It's just the way of the market.

How to keep your nerve?

Expect to see words like "bloodbath" and "massacre" bandied about in a lot of headlines over the next few days. Avoid watching financial TV, particularly the more excitable American variety.

And remember that at times like these, it's very easy to feel the urge to "do something". But it's times like these at which you should very much be avoiding doing anything.

If you have a plan, then you should stick to it. After all, when you made the plan, you knew that the stockmarket was risky. You knew that share prices sometimes go down as well as up. So what's changed?

And if you don't have a plan well, now is not the time to start making impulsive moves. However bad things appear to be now, you'll more than likely make them worse if you just blunder in and start selling stuff or snapping up "bargains" on gut instinct.

If you want something to do, then I suggest you research and build a watchlist. Are there any stocks or investment trusts or exchange-traded funds that you've had your eye on, but haven't found the right price to buy? Now is the time to do that research.

Pick out the assets you think you want to buy and do some scenario planning. What could go wrong? What could go right? At what price, or discount to net assets, does the balance between risk and reward become attractive?

Write it down (spreadsheet or long-hand whatever you prefer). Don't just write down a target price. Keep a note of your reasoning as well. As you're writing, you may well come up with objections or further queries that you wouldn't have thought of if you couldn't see your thoughts on paper.

Also, it's worth having a note for when and if you buy, and you later need to review your rationale. You'd be amazed at how useless your memory is, particularly when it comes to something emotive and existentially important such as money.

Beyond that, sit tight, keep saving regularly, and don't be tempted to turn into a day trader stay focused on the long run.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.