It's official: The S&P/ASX 200 (ASX: XJO) is in a bear market.
A bear market is defined as a drop of 20% or more from its peak.
That happened yesterday when the main bourse plunged as much as 2.6%, before ending the day 1.2% lower at 4,775 points.
A weak lead from international share markets, combined with a sharp dive in oil prices led the rout, adding to the pain from Tuesday's 2.9% sell-off which saw each of our major banks fall an average 4.6%.
Commonwealth Bank of Australia (ASX: CBA) regained some composure on Wednesday after a better-than-expected earnings result.
It reported a record $4.8 billion cash profit – up 4% on the prior year – with no change in net interest margins or loan loss ratio (i.e. bad debts).
Unfortunately, the result didn't inspire shareholders of its big bank brethren. Shares of all three of its major rivals fell deeper into the red, cutting into investors' pockets.
Then there was BHP Billiton Limited (ASX: BHP), which fell another 2.5%…
Woolworths Limited (ASX: WOW) dropped 3.2%…
Indeed, not even Telstra Corporation Ltd (ASX: TLS), the telco that investors tend to turn to when panic strikes, could escape the sell-off. Its shares dropped 3.2%.
As a sidenote, it's worth keeping an eye on Telstra, especially if it falls much further…
As one of Australia's biggest and best companies, it also offers a stunning 5.7% fully franked dividend yield, great for this low interest rate environment.
Indeed, analysts at Goldman Sachs think there are even more opportunities out there right now.
I can't help but agree, and I'll talk about that more in a moment…
But first, let's get back to the state of the market.
The declines from the last two days have dragged the local share market into an official bear market.
The main bourse is down a whopping 9.8% since the beginning of the year, and 20.3% since it peaked in April 2015.
Will they, won't they…
It's tough out there, for sure.
China's economy is growing at its slowest pace in a quarter of a century, and oil prices are languishing around their lowest prices in more than a decade…
Typically, investors have turned to the world's central banks for support during times like these.
But now, some analysts have argued that the central banks are the ones causing much of the disarray!
UBS chief economist Scott Haslem seems to think so. The Australian Financial Review quoted him as saying (emphasis my own):
"What was upsetting the market was the pace the Fed was claiming it was going to raise rates… Now it is seemingly acknowledging some risks there, and if they do choose to slow the pace, that may be a circuit breaker to the volatility in the market."
'The Fed' refers to the Federal Reserve, which is the main body for setting monetary policy in the United States.
It wanted to hike interest rates as many as four times in 2016, building on its interest rate increase from December 2015.
But as The AFR noted, there is (again, emphasis is my own) "a stark difference in opinion between two powerful voices: the US Fed, which thinks it should be raising rates this year, and the market, which is telling it, 'no way'."
Whether or not it is the primary cause of the market's recent volatility is debatable, but it's certainly not helping.
Closer to home, investors weren't too happy that the Reserve Bank of Australia elected to keep interest rates on hold at 2% last week, either.
Although a cut wasn't expected, investors had been hoping for one in light of the volatility since the beginning of the year.
Don't "Sell Everything"
The decision was disappointing for some investors, but also a reassuring one.
Indeed, the very fact that the RBA didn't feel the need to cut interest rates just yet is encouraging.
It noted a decline in the unemployment rate, growth in lending to businesses, and an improvement in the non-mining sectors of the Australian economy.
Those are all good things…
Even more encouraging is the fact it has the scope to cut interest rates further if necessary. It's an enviable position for central banks to be in right now.
Of course, that doesn't take away from the headwinds facing the global economy, but it does indicate that things aren't as bad as some 'experts' have made them out to be.
Analysts at Goldman Sachs tend to agree…
Instead of warning investors to "Sell Everything", just like the bankers at the Royal Bank of Scotland did, they suggest now could be the perfect time to load up on some bargains.
As quoted by Bloomberg, Goldman Sachs' chief economist, Jan Hatzius, said (again, emphasis my own):
"The recent market weakness should provide good risk-adjusted opportunities for those brave enough to defy Mr. Market's gloomy prognosis about the world economy."
Yes, it can be scary investing in an environment like the one facing investors today.
After all, losing money can be painful – especially when faced with the added uncertainty of how low the market will go, and when the falls will stop.
But let me tell you this:
Nothing goes up in straight lines, certainly not share markets.
Like anyone else, I don't know if the market will fall any further, nor do I know where it will be a year or two from now.
But what I — and the analysts at Goldman Sachs — do know is that the best time to buy shares is when they're cheap… When other investors don't seem to want a bar of the market…
The fact is, if fast-growing businesses were attractive six months ago, the ASX's dive has done nothing to change that.
Instead, it has simply presented investors with an even greater opportunity to load up for the long-term!
Sure, there may be some short-term volatility.
But if you can see through the falling share prices and keep focused on the long-term, through the beauty of compounding returns, you should still be able to generate significant wealth from investing in the share market.
