Why the ASX 200 could face a 10% fall

Analysts at Goldman Sachs have forecast a 10% fall in the S&P 500 and the STOXX Europe 600 over the next three months, according to The Australian Financial Review. And if they’re right, the local S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) could be hit as well.

The ASX 200 enjoyed a magnificent run during the month of July, lifting a total of 6.3% during that time. What’s more, it has risen in each of its last six sessions and in 21 of its past 26 sessions.

That’s an outstanding effort, made even more incredible by the fact that Brexit occurred immediately before that rally begun on June 23. You can see for yourself on the chart below:

Source: Yahoo! Finance, author

Source: Yahoo! Finance, author

The ASX 200’s strong gains can be attributed to a number of factors. First and foremost, it seems expectations of at least one more official interest rate cut may have bolstered investor sentiment.

Meanwhile, the local market has also taken its lead from international equities. The S&P 500 in particular has been hovering around all-time high levels, helping to boost share markets around the world. Thus, it stands to reason that if the S&P 500 were to fall, the ASX 200 could follow it down as well.

Of course, watching the share market rise like it has over the last month can be incredibly encouraging – especially for investors in businesses such as Australia and New Zealand Banking Group (ASX: ANZ) and Fortescue Metals Group Limited (ASX: FMG) which have both rocketed during that time.

But it can also be dangerous. Investors can begin to expect that the market will continue to rise, and then fret when it starts to decline. That’s when investors who are unprepared can start to panic, sometimes selling their shares at what could be the worst possible time to do so.

Reflect back to June 23 for a moment. Share markets around the world were thrown into a frenzy when Britain unexpectedly voted to leave the European Union. The ASX 200 itself plunged more than 3% that day, tempting many in the market to sell their shares rather than risk losing more.

The ASX 200 hit a low of 5,080 points that day, and then 5,051 the day after. Since then, however, it has recovered more than 10%, rewarding those investors who kept their cool and didn’t panic.

Investor Takeaway

Markets never rise in a straight line, and you would be foolish to assume that the recent rally can be sustained in the long-run. Of course, it’s impossible to know whether Goldman Sachs’ forecast of a 10% fall in the next three months will eventuate, or whether the ASX 200 will continue to rise toward 6,000 points over the coming weeks.

One way or another, investors should prepare themselves for the worst. Markets will rise and fall in the short-term. But set your focus to the long-run, ignoring short-term market movements, and you’ll likely be rewarded for your effort down the track.

Indeed, after a double-digit rally for the ASX since 2016 lows, investors should be on high alert. Click here or read on below to find a full rundown of 3 shares we think you should avoid today plus one top pick worth buying, even if the market turns south and the RBA keeps rates at an "emergency low."

Free Report: 3 Rotten Shares to Sell, and 1 to Buy Today

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.