The stock market is currently in a ‘correction’. That’s a term widely used to describe a 10% fall in a major index such as the S&P 500. And so far this year, this major US index has dropped by 11%.
Why is the stock market falling?
What caused the stock market to fall? It’s a combination of factors, but I’d say the main one is due to inflation. A small and steady rise in prices isn’t a problem. But when prices rise rapidly, it can cause huge disruption to our economies.
One of the consequences of pandemic-induced lockdowns was higher prices for physical goods. It was widely expected to be a temporary issue, even by many in the world’s largest central banks.
Unfortunately, rising prices started to become embedded into the economy and they showed no signs of slowing down. That resulted in the US Federal Reserve taking actions to slow the pace of inflation.
Many years of ultra-low interest rates and quantitative easing have helped the stock market climb higher. A reversal of that policy could lead to a difficult period for global stock indices.
The war in Ukraine is also causing the cost of energy, fertilisers and other commodities to rise. That has a knock-on effect for companies and consumers, which could lead to an economic slowdown and an even weaker stock market.
To buy or not to buy?
So the stock market is falling, but what should I do as an investor? Should I buy shares now or wait for prices to fall further?
Despite the doom and gloom, there are no guarantees that the stock market will fall by much more. It’s also notoriously difficult to time the market. As such, as a long-term investor, I’d try to ignore the negative news.
I’d stick with my plan to invest in high-quality businesses with strong competitive advantages. These companies should have the potential to withstand economic shocks. And they should have a good chance of thriving over the coming years.
Although I’d buy these shares today, if external economic factors lead to their share prices falling, then I’d buy some more. By doing so, I’d be able to reduce my average buying price –- a process called pound- or dollar-cost averaging.
Some of the US shares on my watchlist include Alphabet, Microsoft, Tesla, Nvidia and Apple. In the UK, I’m watching Diageo, RELX, and Airtel Africa.
Patience pays
Every few years a crisis comes along. In hindsight, those that lead to sharp falls in share prices are often opportunities. Just like the stock market crash at the start of the pandemic that became a 30%+ drop in the S&P 500. A sharp recovery followed that crash and the stock market doubled in value.
That said, history shows that not all recoveries are so swift. Sometimes a recovery can take a few years. That’s why I’d need to remain patient and stick with my plan.
