The S&P/ASX 200 Index (ASX: XJO) is down 0.2% in early afternoon trading, having recouped much of its earlier losses.
In morning trade, the ASX 200 slipped as much as 1.1%. Investors were hitting the sell button here in Australia following large selloffs yesterday (overnight Aussie time) across all the major US and European exchanges.
In the US, the S&P 500 (INDEXSP: .INX) fell 1.6%. The Dow Jones Industrial Average (INDEXDJX: .DJI) had an even worse day, tumbling 2.1%.
The usual bugbears appear to be behind much of the market losses. Namely lingering fears over inflation and rising interest rates, and renewed fears over the spread of the COVID-19 delta variant derailing the global economic recovery.
While those are both real risks to keep an eye on, below we look at why some market experts aren’t overly concerned.
Why these experts aren’t losing sleep over a market crash
The ASX 200 is down 0.9% over the past 5 days, and the S&P 500 is down 2.8% over that same time.
Does that mean the hard-charging bull run is over and we should brace for a share market correction of 10% or more? Or even a crash of 20% or more?
Not according to many market veterans.
Marko Kolanovic, chief global markets strategist at JPMorgan Chase, believes the latest round of selling is overdone. According to Kolanovic (quoted in the Australian Financial Review):
We expect the reflation trade – cyclical stocks, bond yields, high beta stocks, reflation and reopening themes – to bounce imminently as delta variant fears subside and inflation surprises persist.
Capital Economics’ Jonas Goltermann is also decidedly bullish, saying, “Despite some recent setbacks, we think the outlook is considerably brighter than it was then, which is why we still think that US bond yields will rebound.”
Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, adds that while a retrace was expected, the mid-term outlook remains solid:
Valuations across the market as a whole had become stretched and we were due for a pullback. We remain optimistic that the economy is on strong footing and, although the path will be uneven, the trend is still toward increasing growth and higher corporate profits.
Buy the dip strategies on the ASX 200 and global markets
Most long-term investors will tell you it’s a fine line between buying the dip and catching a falling knife.
That means a lot of time when markets (or individual shares) are falling, they can keep falling even after you believe you’ve bought at the dip.
But 2021 has seen the strategy generally well rewarded. With the ASX 200 and S&P 500 rebounding after every selloff.
According to Randy Frederick, managing director of trading and derivatives for Charles Schwab Corp, (quoted by Bloomberg):
The dip buyers have stepped in very quickly and bought very quickly and that’s one of the reasons we haven’t had a full 10% correction – and frankly I don’t think we’ll have one this time either for that reason. Every dip has been bought and immediately paid off within a week or two of not just where it started but above.
Dan Egan, managing director of behavioural finance and investing at Betterment, agrees, saying, “There’s a lot of very young people in the accumulation phase. If they have any excess cash sitting around, they’re going to use it to buy in.”
Among the most bullish of the market experts is Michael Purves, founder and CEO of Tallbacken Capital Advisors. Yesterday, he raised his end of year target for the S&P 500 to 4,800 points. That’s 12.7% above today’s 4,258 points. Purves wrote:
We think the combination of low, and stable, interest rates with a strong earnings growth trajectory will support the equity risk premium at healthy levels at 4,800 at year end. While we are past peak earnings growth, the earnings growth story into and through 2022 will continue to be robust. Further, we find little evidence that a rollover in peak earnings growth is a reason to sell the market.
What about inflation fears?
If inflation rises faster than the central bank chiefs are forecasting, it could usher in higher interest rates sooner than expected. And that would put pressure on equity prices and send the ASX 200 lower.
However, Mark Hickson, 1851 Capital portfolio manager, doesn’t believe this poses significant near term risk, (quoted by the AFR):
The market is becoming more comfortable now with the outlook for inflation. We’re not too worried about inflation or rake hikes in the short term. The equity market typically peaks 12 months after the first rate hike, so we believe we still have a few years of good returns to come.
How the ASX 200 has moved
Despite a small fall over the past week, the ASX 200 remains up around 10% year-to-date. That’s a solid result by any measuring stick, though well behind the 15.1% gains posted by the S&P 500.
Over the past 12 months, the ASX 200 has gained 21.1%.