Just when you thought the pain of a falling share market might be due to end, along comes Friday's 172 point fall in the Dow, its first dip below 12,000 since March.
Locally, the Queen's Birthday holiday temporarily saved Aussie investors from some nasty looking red portfolios on Monday. But not today, although the damage could have been far worse, with the S&P/ASX 200 down only 0.5% as of writing.
Suddenly, in the space of a month, stock market sentiment has gone from hero to zero. The headlines tell the tale…
"Global woes worrying the locals" – Australian Financial Review (AFR)
"Growing signs of a secular bear trend" – AFR
"Roubini Says a 'Perfect Storm' May Converge on the Global Economy in 2013" – Bloomberg
A slowing U.S. economy has been mostly to blame. Whereas not too long ago inflation was the big hairy beast waiting to gobble up our super fund, today it's seemingly as far away as political consensus on the carbon tax.
A U.S. 10-year bond yield of less than 3% tells you all you need to know about future inflation expectations in that country at least.
Enjoy the difference
Here in Australia, we're different. In fact, we're a lot different. Our 10-year bond yield is 5.2%. Competition in the banking sector (at last) means savers can earn interest rates of up to 6.5% on their money, at call.
There is of course a downside. After more than 20 years in the equities game, you learn there are rarely free lunches.
In Australia, our stock market is well and truly stuck. Our economy, for all our resource riches, actually shank in the March quarter. Low to no-growth is no recipe for a soaring stock market.
Not even high dividend yielding shares can help us too much. Compared to that no-risk, instant access 6.5% bank interest rate, a net dividend yield on Commonwealth Bank (ASX: CBA) of 6.1% or Woolworths (ASX: WOW) of 4.4% hardly jumps out and yells "buy me now."
None of this should come as any surprise to regular readers of The Motley Fool. Call us grizzly, pessimistic bears if you like, but when we saw all risk assets, all rising, all at the same time, and all the time, we smelt a rat.
Only 2 months ago we wrote…
"These have been wonderful times for investors. The S&P/ASX 200 closed higher last Friday for the fourth consecutive week. Up until yesterday's wobble, it had closed higher on 15 of the last 17 days. It's a bull market in bull markets."
Today, the boot is firmly on the other foot. Up until Friday, the S&P/ASX 200 index had finished 11 out of the past 16 trading sessions in the red. Today is looking like adding to the hall of shame.
In case you think we're jumping on the bear bandwagon now, it's worth reminding readers that back in April, we were warning of tougher times ahead…
"Party all you like on the resources and Aussie dollar boom, but beware the warning signs. History shows that although people think they can leave the party before it ends, they don't. Hangovers are painful, whatever the source."
Music to our ears
Markets simply do not go up in straight lines. When things look too good to be true, they usually are. In April, the S&P/ASX 200 index was testing the 5,000 level. Today, it's struggling to stay above 4,500, a near 10% fall, and as close to a correction as Greece is to another bail out.
For all this bear talk, let us assure you The Motley Fool has not gone all negative on shares and the stock market.
On the contrary, the bearish headlines above are music to our ears, as they should be for any serious long-term investor. If you are saving for your retirement, who wouldn't welcome the opportunity to buy shares at 10% off where they traded a couple of months ago?
In this 24-hour news cycle, markets instantly react, somewhat violently at times, to the latest interest rate decision, job numbers, economic growth, budget or a pontificating market 'guru', like Nouriel Roubini.
They sell, you profit
But over the course of an investing lifetime, whether RBA governor Glenn Stevens suggests interest rates are heading higher later this year, or not, makes hardly a jot of difference.
Your long-term investment returns will depend far more on your ability to control your emotions than almost anything else. In times like these, when some investors sell shares just to end the pain, use their fear and irrationality to your advantage.
Bring on the bargains.
Of the companies mentioned above, Bruce Jackson has a beneficial interest in Commonwealth Bank and Woolworths. He also has an interest in cash earning 6.5% interest in the bank. The Motley Fool has a patient disclosure policy.