Investing in shares is a risky business - that's why it can ultimately be so rewarding. But at times...
Investing in shares is a risky business - that's why it can ultimately be so rewarding. But at times like these, people sometimes forget that the value of shares can go up as well as down.
Looking back over the past decade and a half, it is clear that once the market establishes a trend, the trend often takes on a life of its own. After the difficult days of the late 1980s and early 1990s, the market embarked on an upward trend that culminated in the "all internet-related stocks will make you a million" frenzy of 1999. Stocks - particularly technology stocks - were going up and up; we had obviously entered a new world where the old rules no longer applied, and nothing would ever go down again.
Of course, in April 2000 the world remembered the rules, so things had to start going down again. At the time people thought that was a crash.
Then, in September 2001, the world suddenly got a lot less safe, and things went down some more. The Federal Reserve slashed US interest rates almost to nothing to stimulate the spooked economy, but things carried on going down and down until March 2003, when the West invaded a country that arguably had nothing to do with the terror attacks and the world was suddenly safe again.
Of course, the US economy was in nowhere near as bad shape as the level of interest rates suggested, and the cheap credit that resulted fuelled nearly five years of rising asset prices across the board and across the world. Now it was not just share prices but commodity prices and house prices that would never go down again, even in countries with so much space to build on that supply constraints should never cause demand-led inflation.
But then house prices did go down - and suddenly the financial markets were a lot less safe again, and all banks were liable to go belly-up at the drop of a mortgage-backed security. Cue sliding share prices and the Fed once again slashing interest rates like there was no tomorrow.
But this trend also seems to have taken on a life of its own. Despite cutting some 125 basis points off the Fed Funds rate since January 21, the markets were piqued at not getting a full 100bp cut at the latest Fed meeting, and the still substantial 75bp reduction that was delivered fell on stony ground.
We are in one of those times when fundamentals seem to matter for little. True, the banks have some dodgy assets sitting on their balance sheets, and consumer-facing stocks might be in for a hard time as the economy turns down. But there are still decent, well-run companies out there, and talented fund managers who know how to find them. Perhaps it is time we all grew up and started focusing on the facts rather than believing the hype. It takes two to make a market, and one of those should not have to be a central bank.
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