Global and Asian markets, including Bursa Malaysia, are seeing a sea of red. What can you do in this time of market correction? Is it a precursor to a recession or crash? Or is it a time to start buying / BTFDing?

 

Correction VS Recession

A correction is generally viewed as a temporary dip in a market compared to a bear market which marks a change of trend downwards.

If we are to look at in terms of percentages, a correction is generally viewed as a 10% dip in the market and a bear market as a drop of 20% or more.

A recession can be defined as an economic decline and generally identifiable with a fall in GDP for 2 continuous quarters.

Stocks started falling on Friday Feb 2 and saw a significant sell off on Monday Feb 5 with the Dow dropping -4.6% (1,175 points: the highest ever single day drop).

What’s the Cause of the Correction?

  • US wages data showing pay increasing 2.9%, which is the highest in 8 years.
  • A spike in US treasury yields fueling speculation central banks may raise interest rates to combat inflation. (reuters.com)
    Note: BNM has come out to say it is normalization and not tightening monetary policy despite the recent rate hike (theedgemarkets.com)
  • Investors getting nervous and fearful of this with tax cuts and increasing budget deficits leading to “Inflation Armageddon”.

 

What is the Probability of a Recession?

Arguments for a Recession

  • With a long bull market run, it’s about time for a recession.
  • Stock prices are expensive and way above the intrinsic value of these companies.
  • Markets (and stock prices) are propped up by cheap money.

Arguments Against a Recession

  • The length of a bull market run has no real relation with a recession occurring.
  • Some markets are looking expensive side but not in extremities. Many emerging markets are relatively affordable.
  • Debt levels are reasonable with quantitative easing stopped. Market and stock prices are in-line with earnings growing, and a positive business environment

Can you Anticipate a Recession?

Flattening/negative US Treasury yield curve: A negative (or inverted) yield curve is viewed as an indicator of an economic recession. Usually for a longer term bond (or treasury), you would expect better returns than a shorter term bond. When short-term yield rates  are higher than long-term yield rates (i.e. 5 vs 30 year & 2 vs 10 year), it indicates that investors have little confidence in the economy. It means investors would rather take long-term bonds at a lower rate than short term bonds with the expectation that the economy will get worse.

Technical indicators with inverse short-medium-long term moving averages

The short-term Simple Moving Average (SMA 50) is still above the medium-term (SMA150), and long-term (SMA200) lines. When the SMA50 goes below the SMA 150 & the SMA 150 goes below SMA 200, it clearly indicates that the market is officially in a bear market.

The stock market is a leading indicator of the economy. Meaning that if the stock market is in bear market, it predicts an upcoming economic recession around six months into the future.

 

What’s Your Next Move?

Keep things simple: make sure your emergency savings and cash are enough, and then continue investing regularly as per your investment plan in ETFs, or individual stocks with a greater emphasize on wide-moat stocks.

Know that corrections are good for a market to avoid a bubble, and to drive further growth ahead. Allow time for panic-selling to subside over the course of this week. Be patient, keep an eye out for the facts of what is happening, and avoid being emotional. If you are looking to enter new long positions, you may want to stagger your entries over a longer period.

Make fear your friend: wide-spread fear is good for you as an investor to buy great companies at low prices. Avoid having personal fear paralyze you or drive you to make unwise emotional decisions. If the market does go into a bear market, good sectors that are least affected include consumer staples, healthcare, and other defensive stocks. As Buffett’s oft-repeated line becomes action in practice:

“Be fearful when others are greedy and greedy when others are fearful.”

What are your thoughts on the market correction? What advice would you want to share with all MyPF readers?