Why the US market fall may be an opportunity for investors
Armed conflict in Ukraine is driving down stock prices, but long-term investors might be better off staying the course.
Shares in the US closed at their lowest levels since June 2021 yesterday and continued to fall this morning as markets around the world flutter with armed conflict erupting in Ukraine..
The S&P 500 fell into bear market territory yesterday, down 12% in total since January, and the technology-based Nasdaq-100 fell near bear market territory today, though both were off their lows near midday.
The potential for an armed conflict between the Ukraine and Russia has weighed heavily on stock prices as the price of oil and gold surge as investors look for safe havens.
But as Warren Buffett famously said, “be fearful when others are greedy and greedy only when others are fearful.”
So is this market volatility actually an opportunity for you?
Investors urged to stay the course
While the market remains volatile, investors are being urged to stick with their strategies.
This is because AMP Capital’s chief economist Dr Shane Oliver said that drawdowns are a normal and healthy part of any market cycle.
According to Dr Oliver, markets usually follow the same cycle post a historic event.
“The pattern is pretty much the same for most events, with an initial sharp fall in the share market followed by a rebound,” he explains.
“Since World War II, the average decline has been 6%, but 6 months later the share market is up 9% on average and 1 year later it’s up around 15%.”
Echoing Dr Oliver’s sentiment, Morningstar’s chief investment officer Dan Kemp told investors that “the lesson of today is don’t get drawn into these short-term changes”.
The market has already fallen
While going with the market might seem practical, after all the mob probably knows something, it is the opposite to what retail investors should do.
Dr Oliver also highlights in some instances the damage is already done, with investors already losing part of their wealth.
“Selling shares or switching to a more conservative investment strategy after a major fall just locks in a loss and trying to time the rebound is very hard such that many only get back in after the market has recovered,” he said.
In fact, the economist says investors could look at this as an opportunity.
“When shares fall, they are cheaper and offer higher long-term return prospects. So, the key is to look for opportunities the pullback provides. It’s impossible to time the bottom but one way to do it is to average in over time,” he explains.
What should investors be looking to buy?
The clear winner is in the energy and oil sector due to it being the most likely to be impacted by the armed conflict between the two European countries.
Morningstar’s analysis shows US pre-market movers Exxon, ConocoPhillips and Chevron outperformed due to riding the crude price rally. With inflation high, oil stocks have already shown strength in 2022.
At the same time, traders are pricing in higher interest rates which is leading to a further tech sell-off.
More pain could be on the way for these investors.
“Stocks, especially growth stocks, are priced for a lower interest rate environment than we’re likely to have over the next few years,” said Stephen Auth, chief investment officer of equities at Federated Hermes. “There’s a kind of reset going on in stock market valuations.”
While the future for tech remains uncertain, long-term investors should take it as an opportunity to add to their portfolio.
During times of uncertainty, Kemp suggests investors go back to the fundamentals.
“What you can do is look at individual companies, asset classes a long way into the future and what the expected fundamental returns are from these businesses,” Kemp said.
“So always focus on the long-term, don’t get distracted by the market noise and don’t get drawn into decisions you might regret later on,” he concludes.
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