Share markets have put on a ferocious resurgence recently, after United States inflation figures came in lighter than expected last week.
In fact, the S&P/ASX 200 Index (ASX: XJO) has now gained a tidy 6.9% over the past month. Not bad after being down 14.9% year to date.
Because several consecutive steep interest rate rises are now behind us, some experts have speculated stock markets may have passed the bottom.
"There is a rising chance we have seen the low in shares," said AMP Ltd (ASX: AMP) chief economist Dr Shane Oliver earlier this week.
"At last, it seems some of the bad news for shares appears to be abating."
So what do ASX share investors do now?
How can you call the bottom when things are still so bad?
Many investors might be wondering how experts can call the bottom when inflation is still rampant — it's 7.7% in the US and 7.3% in Australia.
American financial expert and long-term buy-and-hold advocate Brian Feroldi reminded his newsletter subscribers that the stock market is "a forward-looking machine".
"It doesn't care about where we are. It only cares about where we're going," he said.
"This is why markets tend to bottom while the headlines still look awful."
He recalled some of the new headlines on 9 March 2009, which was when US share markets bottomed in the midst of the global financial crisis:
- "Collapse of the financial sector harder, deeper than tech wreck"
- "US to push for global stimulus"
- "China warns of severe fiscal conditions"
- "UK says markets need crisis plan"
- "The bear growls louder"
- "Jobless scars will outlast the recession"
Feroldi pointed out how there was absolutely no good news or optimism at the time. Yet the share markets started their rise from that point.
"Do you see any good news? We sure don't. In fact, it wasn't until April 2010 — 13 months later — that unemployment finally peaked," he said.
"Yet, if you… waited on the sidelines until April 2010 to start investing in stocks again, you would have missed out 80% of the market's gains."
How to capture the ASX share recovery
Of course, no one should expect a smooth, linear upward progression from here. ASX shares will experience many dips ahead.
But for Feroldi, there's only one way to take advantage of this potential bottom.
"The takeaway is that you can only capture all of the stock market long-term gains by remaining invested," he said.
"That's easy to do in theory, but damn hard to do in practice."
The lesson is that none of us will know whether this is the bottom until much later — maybe six months down the track, or even a year.
But if you wait until then to buy shares, it will be too late. You will have missed all the spectacular recovery gains.
So buy now with a long-term horizon.
"We certainly hope that we've hit a bottom and that the economic picture gets better from. However, the only way we'll know that for sure will be with the benefit of hindsight."
