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Stock Market Slump? How to Respond

Take a deep breath and find a pen...

SO MUCH for the Santa rally, writes MoneyWeek's executive editor John Stepek in his free daily investment email Money Morning.

The Federal Reserve has hinted at going easy. Donald Trump and China have kind of, sort of, kissed and made up. Italy – the Eurozone's most immediate problem – appears to have dropped off everyone's big worry list.

Yet the market is tanking.

What's going on?

We've already written about the yield curve. To cut a long story short, long-term US bond yields are falling more rapidly than short-term ones, and this is often a warning sign that a recession is headed our way (although maybe not for up to two years).

We're not quite "inverted" yet (which is the key signal) but we're not far off it.

This does seem to have rattled markets badly. But you can look at a lot of other things and point to them as being catalysts.

Last week came news that Meng Wanzhou, chief financial officer of Chinese telecoms group Huawei, has been arrested in Canada, and faces extradition to the US. Reports suggest that it has something to do with violating sanctions against Iran, although none of this is clear yet.

That has markets feeling doubtful about the success of the whole US-China trade deal.

But really this is just a story to hang the latest market decline on. The reality is that this whole year has been about the fact that monetary policy is getting tighter. And as the year has gone on, the market has steadily lost confidence that this can just be shrugged off.

The steady march towards an inverted yield curve is just the most obvious indicator of this.

What does this mean for you as an investor?

None of us can predict what's going to happen to markets in the short term. In the longer run, you can make a loose guess based on how expensive markets are when you buy them, but even that is a tricky business.

Your overall plan should be to favour cheap markets, avoid or "underweight" expensive ones, and save regularly towards whichever long-term financial goals you have decided on (and there really are only a few that are long-term enough to justify investment in stocks – retirement being the main one).

And in the course of executing that plan, you have to expect that sometimes you're going to run into stormy weather. It's just the way of the market.

How to keep your nerve?

Expect to see words like "bloodbath" and "massacre" bandied about in a lot of headlines. Avoid watching financial TV, particularly the more excitable American variety.

And remember that at times like these, it's very easy to feel the urge to "do something". But it's times like these at which you should very much be avoiding doing anything.

If you have a plan, then you should stick to it. After all, when you made the plan, you knew that the stockmarket was risky. You knew that share prices sometimes go down as well as up. So what's changed?

And if you don't have a plan – well, now is not the time to start making impulsive moves. However bad things appear to be now, you'll more than likely make them worse if you just blunder in and start selling stuff – or snapping up "bargains" on gut instinct.

If you want something to do, then I suggest you research and build a watchlist. Are there any stocks or investment trusts or exchange-traded funds that you've had your eye on, but haven't found the right price to buy? Now is the time to do that research.

Pick out the assets you think you want to buy and do some scenario planning. What could go wrong? What could go right? At what price, or discount to net assets, does the balance between risk and reward become attractive?

Write it down (spreadsheet or long-hand – whatever you prefer). Don't just write down a target price. Keep a note of your reasoning as well. As you're writing, you may well come up with objections or further queries that you wouldn't have thought of if you couldn't see your thoughts on paper.

Also, it's worth having a note for when and if you buy, and you later need to review your rationale. You'd be amazed at how useless your memory is, particularly when it comes to something emotive and existentially important such as money.

Beyond that, sit tight, keep saving regularly, and don't be tempted to turn into a day trader – stay focused on the long run.

Launched alongside the UK's highly popular The Week digest of global and national news in 2001, MoneyWeek magazine mixes a concise reading of the latest financial events with expert comment and investment ideas.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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