You're probably familiar with the old adage, 'Share markets go up by the stairs and down by the elevator.'
The idea is that it can take years for share markets to gain 20%, while they can lose that much in a matter of weeks.
But there's a reason I called it an 'old' adage. That's because in recent years, share markets are as prone to take the elevator up as they are to ride it down.
Now that's neither inherently good or bad. It's simply a new reality we need to be comfortable with as investors.
There are a number of culprits driving this change of pace. I won't list them all, but here are some of the larger factors: the rise of high-speed trading; the growth of leveraged derivatives markets; Robinhood investors chasing the latest 'hot ASX tips'; global leaders directly involving themselves in the stock markets, talking share prices up or down (yes, we're looking at you Donald Trump); global central banks becoming ever more proactive with quantitative easing (QE) and ever lower interest rates; and most recently, global governments pumping out trillions of borrowed dollars in fiscal stimulus to keep their economies afloat during the coronavirus pandemic.
Of all the factors above, central banks' easy money policies and governments' herculean spending packages are the 2 biggest drivers pushing share markets into the elevator on the way up.
Remember late 2018?
Let's look at the phenomenal influence of central bank actions first. And we'll turn the clock back 2 years to the days when the only corona anything the world was familiar with was the beer.
The first 8 months of 2018 saw the S&P/ASX 200 Index (ASX: XJO) gain 3%. Not exactly shooting the lights out. But then that figure doesn't include dividends.
Then the world's most watched central bank, the US Federal Reserve, ushered in 2 more interest rate hikes. Those came atop the 2 the Fed had already passed earlier in 2018. This saw the official US interest rate rise to 2.5%. And it earned the wrath of Donald Trump.
Why?
Because Trump had pinned the strength of his presidency on the strength of the share markets. And with the Fed indicating it planned additional monetary tightening (less easy money) in 2019, share prices tanked in markets across the globe.
From 31 August through to 21 December 2018, the ASX 200 fell 14%. Investors with shares in the BetaShares Australia 200 ETF (ASX: A200) would also have lost 14%, as the exchange traded fund is designed to closely track the movements of the ASX 200 index.
US markets were even more battered. Tech shares had been performing strongly in the first 3 quarters. This saw the tech-heavy NASDAQ-100 (INDEXNASDAQ: NDX) gain 15% by 28 September.
Then the central bank-inspired selling began. And from 28 September through to 21 December, the Nasdaq 100 dropped 21%. Aussie investors holding shares in Betashares Nasdaq 100 ETF (ASX: NDQ) would have seen the share price drop 17% over that same time.
So what happened in late December 2018?
US Fed Chair Jerome Powell reversed course, indicating there would likely be no further tightening in the immediate future. And indeed, the US Fed cut rates twice in 2019, along with providing additional QE. As did other central banks across the world, including the Reserve Bank of Australia.
The result?
The BetaShares Australia 200 ETF share price gained 30% from 21 December through to 21 February. And the Betashares Nasdaq 100 ETF share price gained 61% over that same time.
I'm sure you recall what happened in the weeks after 21 February.
Enter COVID-19
If you want a snapshot of share markets riding the elevator down, there's no period like the month from 21 February through to 23 March that illustrates this better.
During this time, the BetaShares Australia 200 ETF share price lost 35%. And the Betashares Nasdaq 100 ETF share price lost 21%.
Historically, if share markets needed to laboriously climb back up the staircase, recouping those kinds of staggering losses could take years.
But this time, the world's central banks, who moved quickly to slash interest rates to new record lows and dial up the QE, were joined by global governments, who unleashed trillions of dollars in fiscal stimulus. With both governments and central banks vowing to do whatever it takes to keep their economies afloat, investors began to take note.
And on 23 March, share markets pushed the up button on the proverbial elevator.
This saw the BetaShares Australia 200 ETF share price rocket 36% as of last Monday 19 October. Similarly, the Betashares Nasdaq 100 ETF gained 41% as of Wednesday 14 October.
Since then both ETFs (and the indexes they track) have fallen. Betashares Nasdaq 100 ETF is down 4% from its recent peak last week, while BetaShares Australia 200 ETF is down 3%.
Could they have further to fall?
Of course.
Which brings us to the question…
What do you do when your ASX 200 shares are falling?
Now obviously that decision is up to you and your own personal circumstances.
You may want to run the old slide rule over your specific share holdings and weed out any you believe won't hold up over time, or add some that look unfairly beaten down.
But with today's share markets as likely to ride the elevator up as down, if you're happy with the longer-term outlook of the shares in your portfolio, your best bet may be to do nothing at all.
