Happy New Year: The forecast for 2019 is…volatile

New York Stock Exchange

After a couple of years of strong growth, the markets succumbed to uncertainty in late 2018, turning into what could probably be described as a ?bear market? for the most part in the final weeks of 2018.

But then suddenly, Trump decided to go visit the troops in Iraq and the Dow did an unexpected u-turn, recovering 5% overnight on December 28th, with the NASDAQ recovering 6%.

There is never much rhyme or reason to the market’s rises and falls. David Lange once described the markets as ?reef fish?, and it was probably a fair assessment. Markets react dramatically to just about anything at all and the rhyme or reason often is a bit unclear, to say the least.

A particular security can have 10% wiped off its share value overnight because its forecasts have just been shown to be a little optimistic. It is desperately unfair: I have prepared a lot of forecasts in my time, and they can best be described as ?pie in the sky?, because nobody (not even climate change proponents) can actually predict the future, and no matter how hard you try, forecasts can be scuttled by all sorts of events outside of your control. However, market regulations require that forecasts be lodged, and then if there is any variation (other than significantly upwards), the share price is punished. It is madness, but the madness has persisted for a long time, and nothing is going to change any time soon.

The forecast for 2019 is…volatile, but then, in the current environment, it would be mad to predict otherwise. All sorts of factors are at play here, and a lot is uncertain. Trump’s government shutdown is causing jitters in the US. Rising interest rates in the US, after a decade of almost free money, are having an effect as well. Trump’s trade war with China is also major factor. No one knows how this will play out in 2019, but my money is on Trump. China is reported to have significant debt issues and can hardly afford to fall out with the USA. While Trump has never been known to blink first, he is also a deal maker, and if a deal can be made here, Trump will make it happen. Watch that space with interest.

Then there is Brexit and with 3 months to go a hard Brexit is looking more and more likely. Personally, I think this will be good for Britain in the long term, but the first year or two could be very rocky.

A reasonable chunk of the current market volatility is a straightforward market correction. The markets have enjoyed significant growth over the last couple of years, and it goes without saying that it cannot last forever. At times like this, the best advice I can give is – don’t look. Don’t stress over the value of your portfolio and don’t look at your Kiwisaver. Chances are, they have been doing brilliantly over the last few years and even with a correction, you are still on the winning side. Don’t panic. The good times will be back. If you do have a bit of money available to invest, it is a good time to buy. If a favourite equity of yours has just lost 10% of its value, buy some more. Price averaging your portfolio is smart, and if your chosen equities are strong, they will recover in time and your profits will be all the sweeter for the gamble you took. Yes, there is an element of gambling here, because no one can predict the future, but if you have done your homework, you should have no sleepless nights at all.

The other piece of advice I would like to give is don’t sell out because things are not going well. Once you have sold at a loss, that loss is forever. If you do not have to sell and can hang on, those losses may not be losses in a year or so. Once you have locked in a loss, however, there is nothing you can do to fix it.

As to what you should buy…well, I read the New Year market reports year after year, and the so-called experts always tell you to do the same thing. I’m not going to tell you what to invest in, but I will make one suggestion. Capital gains are wonderful, if you can get them, but they are a very unknown quantity. Whatever you look to invest in, always look hard at the return. Dividends, interest rates, whatever; returns are much more reliable than capital gains. Although returns are never guaranteed either, they are a lot more certain than capital gains and you can probably rely on them year after year.

Whatever your risk profile, the best thing to do is to stick with your principles and ride out the storm. Markets have good periods and bad periods and this is probably not a great one. There is talk of a significant slowdown in 2019, as it is now 10 years since the GFC. This may turn out to be true, but the GFC was a major adjustment and many countries have only started to recover properly in the last couple of years. Even if we do have a couple of recessionary quarters, I would be surprised if we experienced a significant global downturn when we have only just recovered from the last one. That would be really unkind, wouldn’t it?

Happy investing, everyone. Remember the reef fish. The best way to survive the markets is to take a lot of deep breaths and to not take it all too seriously. Hold your nerve and you may make money in the long run.