This year have been particularly tumultuous, while many analyst referenced back to the global financial crisis of 2008, I believe times are not as bad as then. There had been many factors this year that caused markets globally to go on a roller-coaster ride. While Mr. Market usually responds erratically, even more so in recent times where volatility is at a all-times high, we should view it as more opportunities opening up.
1. China's slowdown
Firstly, the drastic slowdown in China's economy has caused a rippling effect throughout Asia, and to a lesser extent the US. ^STI crashed from a yearly high of 3,539 to 2,800 - a value not seen since 3 years back. Being one of the world's largest economy, a drop in imports will affect global markets especially that of the manufacturing sectors. This has caused many companies, especially Asian ones, to report lower earnings and gloomy forecasts. However, China's growth is still rather moderate and a slowdown is definitely to be expected given the fact that they have been growing at about 9% yoy for the past many years and also the gradual appreciation of the Yuan.
I do not believe that this particular factor would cause such a plunge in the STI, although much of the components of the STI draws part of their revenue from China. Being a relatively small market, a negative sentiment could easily result in overselling of equities, and investor sentiment do not seem to be recovering soon given that there are alternate markets for them to go to now (point 2.) On the bright side - if all the negative factors remain status quo - the fall seems to be bottoming out and slight market noise would not appear to bring it down much further. Long term monies could see themselves invested in a STI ETF or STI blue chips.
2. Fed's rates hike
Finally the rates have taken off since 2008 where it turned flat due to the global financial crisis. The road to recovery had been a rather slow but steady one. Many analyst have thrown their predictions about future rates, with some saying that it will soon go back to 0% while others see a gradual rate hike in years to come. Of course, many know that the reason for controlling the interest rate is to curb or promote inflation, the underlying factors that will ultimately determinate the interest rate is the economy itself. Should major companies start to report low earnings and slow growth, the fed would have no choice but to drop it to promote lending. However, if the economy really gets on track, then gradual rate hikes would not be a surprise. My knowledge is rather insufficient to predict the market's direction so I'm not going to bet on either way.
One point to note is that although the DJIA plunged nearly as hard as the STI, the DJIA have seemed to make a near-full recovery since their lowest in August, while the STI is still not far away from their year low. This stress test proved that the US market is rather strong at absorbing negative impacts. The increase in rates have opened up more opportunities for investors in terms of bonds returns. A sell-off in equities and a increased returns from bonds resulted in a double hit towards shareholders, but true investors would not be bothered by temporal influences and instead look at it as a bargain sale. However, for the more risk-adverse investors, bonds would not be a bad place to place monies in now - as a drop (if) in rates would cause existing bondholders to have even more profit, while should a gradual rate hike happen, one can always DCA into it - I don't think rates will climb much higher in the near future anyway.
3. Oil price crash
The drastic fall in oil prices would certainly have the same, if not much more, impact than the slowdown of China's GDP, although in one way or another they are so very intricately linked. Crude oil had seen prices of ~60 drop to a recent low of 36 - nearly half. This has caused many oil-related industries (save for those that buys oil of course) to experience massive losses and some filing for bankruptcy. OPEC has responded with falling oil prices by pumping even more oil out, with a few countries jumping in the production bandwagon (lol, what?!). This has caused companies that gains their revenue from oil companies - such as those who supply valves, tanks, indicators, etc. - to also report losses as they have reduced sales and stuff.
The extremely volatility in oil prices was also made worse by various financial institutions that peddles with oil derivatives, one of the factor that caused the previous oil crash. However, this could also mean that prices will never be too low, as investors would jump into buying oil and its derivatives even if they had nothing to do with oil at all.
Personally I shun commodities, companies which are dealing heavily with commodities and in a way cyclical stocks. They do not let me sleep in peace. When I buy into a company I expect to hold them for a loooooong time, thus for me to hold a share when it merely fluctuates between a ceiling and a floor doesn't make sense - that's would be the ideal stock for traders, though. This is different from market volatility which I do not mind.
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Given all the points as discussed, I believe actions would take much more weight than talk, and that predicting the rain is useless without actually building the ark. However, I am still extremely risk adverse and as investors are all on their toes right now - jumping into action with every major news - I would enter bit by bit and be prepared to DCA into dropping markets. The chance of profitability is quite high now should one throw in the entire pot and the bear reverses - but nah.
With the increase in rates, corporate bonds ETFs* would seem like a good place to start with as their returns are increased and bonds are also generally less volatile than equities. I will also buy into high cap companies* providing decent dividend yields given the fact that the market crash have brought yields to yearly highs. Should a capital appreciation take place there will be more profits to be seen too.
In the inevitable (I don't mean to sound like a fortune-teller sorry) future that oil prices rise, even if the Fed and China stays status quo, companies that are hit the most now would be those that see the most profits, and if it is high enough the Fed should also hike raise accordingly. When that happens, existing shares bought now at their rather low prices could see a substantial capital appreciation and also dividend yields (compared to prices that shares were bought at). However, one should still be prepared for markets going further south as prices ultimately depend on investors sentiment, even though intrinsic value is what we should be investing in.
"Price is what you pay, value is what you get"
P.S. Yes I know about the Europe crisis but I am not particularly interested in that.
Disclaimer: Information may not be totally accurate, most of it are from memory and basic referencing. This post is not meant for solicitation of funds of any kind, well this is not even an advertisement. This post is also not suggesting you to do anything at all, so if you're on your bed reading this, stay on your bed. The author holds no liabilities for any incident that arise be it loss of profit, capital, consciousness, limbs or organs.
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