Over the past week the western world hosted holiday celebrations which caused for a great amount of cheer and joy however the markets are showings concerning signs. This past week investors saw two historic events, first the largest point drop of the Dow Jones industrial average (the DOW) for Christmas eve on record, followed by the largest one day gain in history of 1,086 points on December 26th. One would expect that after a historic rally of the DOW and other US indices that traders and investors would be joyous and celebratory but that is not the case. Investors are becoming increasingly wearier as fears amount for what 2019 has in store.
This past year has been every challenging for investors, at the beginning of the year markets were at all-time highs and believe to be headed higher. Despite a downturn in February due to a spike in the volatility index, markets continued to edge higher until the beginning of October, that’s when things started heading south. These downturns in the market are to be expected and have been called to occur by top pundits for the past two years. When one has an in-depth look at the markets one can see that there are numerous issues such as valuations, debt levels, and global macro problems which have been amounting and continuing to build over time. As the famous physics Sir Isaac Newton put it, what goes up must come down, these principles also take place in the market. Perhaps the downturn of markets in the past month are the start of a down cycle and the early stages of a recession however, as the saying goes the painting was on the wall, but investors are finally coming to fruition that perhaps the longest bull market in history is over.
Wallstreet had a great run over the past 9 years where the world was witness to the longest bull market in history beginning in March 2009 to the end of September 2018 which saw the DOW quadruple. The new year and thus forward will be very challenging for investors as fundamentals start beginning to matter once again, the buy anything rally is over. Personally, this was evident when the world’s largest bio tech IPO in history Moderna, went public on December 7th raising over $600 million with a valuation of $7 billion. On the first day of trading the stock fell over 20% and is currently down 41.2%, this shows that investors finally might be starting to question what they are actually buying once again.
It is important that investors really understand the severity of what is to come in the new year, and that lower markets and increased volatility are back. The magnitude of the downturn has the potential to be substantially large as many first-time investors especially in Exchange Traded Funds (ETFs) have the possibility to sell their holdings at the click of a button. This selling pressure is then also increased by algorithms driving the market further down. There has been a common tone with multiple long-term affluent investors that I have spoken with, they all utter that nothing makes sense right now, and I believe they’re right. Taking this into account it is important to really understand what is going on in the world and where possible opportunities and problems might arise from. Seeing how markets are heading into a downturn it might be advisable to take some money off the table ultimately for investors to hold more cash. I hope that everyone takes what has occurred in the past and especially this past year to heart and to learn from their mistakes. In times of a bear market, things might not always make sense however as long as one ensures that proper due diligence is done, and the right risks are taken performance can still be positive.
Kenneth Kaczkowski is an Investment analyst in Munich.