The FTSE 100 closed yesterday at 5674 points, which was a drop of 3.3% on the day and a fall of just over 9% since the turn of the year. More significantly though, it meant that the UK’s leading index had fallen by 20.1% since its April 2015 high of 7103 points. As a result, we are now officially in a bear market.
Clearly, a bear market is likely to cause fear among investors and there is a good chance that the FTSE 100 will move lower in the coming days and weeks. That’s partly because of the panic which tends to take over the market during such periods, with share price falls leading to more sells and more falls and so on.
Furthermore, the price of oil and other commodities are likely to fall even more in the short run. That’s because Chinese growth continues to slide, while the lifting of sanctions on Iran is set to cause an even greater supply of oil moving forward.
While everybody’s instinct is to sell up and run a mile from what could be a difficult period, logic says that a bear market is the time to buy, rather than sell. In fact, history tells us that the best time to buy shares is when their outlook is most bleak, with the FTSE 100 having always recovered strongly from bear markets in the past. Notable recent examples are the credit crunch, when the index hit around 3500 points in March 2009 before doubling over the next six years, and the dot.com bubble when similar falls and gains followed.
Clearly, most investors are not buying at the moment and sometimes it can be tough to go against the herd. However, the reality is that the global economic outlook remains relatively positive. Certainly, China is a short term concern, but as a long term driver of world economic growth it remains unparalleled. The wealth creation which is ongoing in China is simply staggering and it is set to become an even bigger importer of consumer goods from across the globe.
Similarly, the US economy continues to perform well and just last month was viewed as being strong enough by the Federal Reserve to stomach an interest rate rise. While the Bank of England may be less keen than their US counterparts to raise rates, the UK continues to benefit from low inflation and real-terms wage growth which should allow it to post strong GDP growth over the medium term. Meanwhile, Europe’s adoption of quantitative easing also means that it has a potentially upbeat medium term outlook.
Although fear and panic can make investors focus on the short run, it is essential to instead consider the long run. Certainly, paper losses are always painful, but a missed opportunity to buy high quality companies which may go on to rise at a rapid rate further down the line would be also be undesirable. By focusing on company fundamentals and facts and figures, investors can overcome their fear and pick up bargain stocks for the long term.
