It has been a torrid time for just about everyone over the past 18 months. Ever since the deadly Covid-19 pathogen appeared on the global stage last year, people’s lives have been disrupted.
It is not just entire populations that have been forced to adjust to the pandemic. Businesses have been compelled to rethink the way they operate. Central banks have scrambled to initiate monetary policies to support their governments that have cobbled together emergency fiscal support for their embattled economies.
Meanwhile, pharmaceutical companies have developed game-changing vaccines in double-quick time. And in spite of all the upheavals and the fact that many global economies are reeling, stock markets have marched to the beat of a different drum, with the US Federal Reserve as the lead percussionist.
Going through hell
The market, it seems, has embraced with enthusiasm Winston Churchill’s amusing but sagely advice: If you are going through hell, keep going.
Stock markets around the world have just kept going. They are enjoying their days in the sun, even though massive uncertainties still hang over the economies they operate in.
But the gung-ho, can-do spirit that has kept global bourses on steroids has now been replaced by a harsh dose of reality.
Can stock markets continue to justify their lofty valuations? What happens if new Covid-19 variants should bring about fourth, fifth, or even sixth waves of infections?
What if the horrifying situation in India that we are witnessing is a prelude of what the rest of the world can expect? This virus has been sneakier than any of us ever expected. It has found ways to evade detection. It has mutated to side-step vaccines. What if we can never eradicate the virus?
Another big worry
Then we have inflation, which has almost replaced the pandemic as the new topic of interest on the markets. Business channels often tire of talking about the same thing repeatedly. They need something fresh to excite their audiences. So, inflation is now the hot-button issue.
What if the inflationary pressures we are feeling are not transitory, as central banks keep telling us? What if inflationary pressures should persist? What will central banks do then? Will they ignore inflation, or will they be forced to eat their words and hike rates?
These and other questions are now preying on investors’ minds, in much the same way that wall-to-wall coverage of Covid-19 struck fear into the hearts of every investor only last year. Sure, the pathogen is still out there. But inflation is a far sexier topic.
Fear and greed
The greed that has persisted in the market has now been replaced by fear. Both fear and greed are unquestionably powerful emotions. They can be greatly magnified when mixed with a dollop of recent-event syndrome. This is where something is considered to be vitally important because it is the most recent thing that has happened.
So, when we see the price of our investments fall, it is very easy to convince ourselves that somehow the decline must be attributed to something that has recently happened – even if the drop and the recent event are not connected.
For instance, shares have fallen because of concerns over inflation. But inflation is not bad for every company. The market seems to think it is, though.
So, is inflation something to worry about? Right now, there is a bit of inflationary pressure, as economies start to open up. There are signs that unleashed pent-up demand cannot be completely satisfied by supply. The imbalance has pushed up prices of some goods and services.
Some home truths
But here is the thing: we should always be aware of the impact of inflation on the value of our money over the long term. Even a modest inflation rate of 2 per cent can halve the buying power of our cash in 36 years. For those of us who are saving for our retirement, that could be a problem, unless we invest in inflation-beating assets.
So, is selling our stock-market investments, which is what traders are doing right now, the right thing to do?
Definitely not. In fact, as long-term investors, we should welcome the sell-off. It could be a good opportunity to buy prize assets at reduced prices.
As consumers, we love bargains. We love those buy-one-get-one-free deals at supermarkets. We love those dining offers where two people can eat for the price of one. But for some reason, we cannot quite get our heads around share-price falls. For some reason, it freaks us out.
Rather than being perturbed by the stock market declines, we should be grateful. We can only do that if we avoid recent events and focus on the long term. It takes courage to buy when others are selling. It takes willpower to ignore recent events. But if we cannot do that, then maybe investing in shares is not right for us.
Note: An earlier version of this article appeared in The Business Times.
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Disclaimer: David Kuo does not own shares in any of the companies mentioned.