Interest in investing in stocks among people in the Czech Republic has been growing in the last 2 years, mainly due to the fact that it has been significantly simplified by online platforms such as XTB, LYNX, Patria Finance and others. Investments have also become significantly cheaper thanks to Exchange Traded Funds (ETFs), which do not incur any large fees and can be invested from as little as CZK 1,000. Investing has ceased to be something for the rich, today everyone can start it.
Particularly popular are “étéefka”, which can be traded via a mobile application, such as Porto (Wood & CO), Fondee or Indigo (Patria Finance). They offer trading according to the proven S&P 500 index, which holds the shares of the 500 most powerful American companies.
Those who started investing two years or less without having any previous investment experience may have been satisfied in recent years. The evaluation grew pleasantly and except for the rapid and short fluctuation in the spring of 2020, which was caused by the onset of coronavirus, everything looked idyllic. Investment novices could say that the volatility was not so bad, in fact, a kind of tremor that would pass again.
Inexperienced people flee from loss
But now, for the first time, novice investors are coming into conflict with the reality that investing in stocks will bring once in a while, and that is a long-term decline below a psychologically tolerable level. While since mid-2020 they have witnessed constant growth and have watched as their profit steadily grows, since December 2021 the situation has reversed. They watch with apprehension as their investment slowly and surely falls into a loss of 5%, 10%, 15%. A few days ago, in mid-June 2022, the markets recorded loss of 20%, which is the limit that declares the so-called bear market.
There is panic among less experienced investors, who do not yet have the nerve to develop such a development, and are beginning to “save” what is left. So they sell at a loss. With little knowledge of the laws of how stock markets work, then to the detriment of an initially enthusiastic investor, he may dismiss the investment as a loss-making affair that does not pay off.
On the other hand, an experienced investor, whose investment is currently being carried on a bear, sleeps completely calmly, and if he has free money that he may lack, he will buy more shares. It buys on sale, cheaply, with the proviso that when the markets recover, the trend will turn from bearish to so – called bull, growthearns much more on price difference.
What advice to an inexperienced investor who is not yet used to significant market fluctuations?
The declines in the markets are, of course, unpleasant, but also completely natural. The stocks had two years of rocket growth and sooner or later some significant decline would come,
says an investment analyst at Broker Trust Vaclav Pech.
For someone who has invested a one-time higher amount at the top of the market, it is, of course, a painful fall, but let him take another look back at history. Investors who put their money in the S&P 500 at the beginning of 1938 and held the position until the end of 1947, despite the worst of the war the world has ever known, when their investment was significantly negative, eventually achieved an average annual appreciation of less than 15%, which is undoubtedly very decent,
calculated by the analyst.
According to Jana Brodani, Executive Director of the Association for the Capital Market of the Czech Republic:
- Don’t panic when the market falls. When you set out to invest in stocks, you set a long-term horizon, lasting at least 5, but rather 10 or more years.
- Observe the planned horizon. Plans are to be followed, that’s what plans are for.
- Do not compare last year’s revenue with current revenue. They are different every year. Sometimes success is bigger, other times less.
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Understanding the laws of capital markets and their behavior over the years is also an important condition for successful investing. While the novice investor will understand the bull market, where yields are growing for a long time, very quickly, the behavior of the bear market is a good idea.
What is a bear market?
The bear market is a fall in prices aggregated in indices, namely 20 % from its current highs. They may or may not be accompanied by an economic recession and increased unemployment, as is the case here, for example. On the contrary, the recession may be due to falling stock prices. This type of bear market can take months or years if investors prefer risk-free, fixed-rate instruments.
The bear market can look different. The last time we experienced it in March 2020when the world was surprised by the incipient coronavirus pandemic. Stock prices flew down in almost a free fall, without warning, after a long, almost 11-year-old bull market (ie a time when prices rose). The price war on the oil markets between Russia and Saudi Arabia was involved, thanks to which the price of oil fell to a long-term minimum. The March bear market fell by 30% between February and March 2020. However, in mid-August it reached its record highs again.
In contrast, the deepest and longest bear markets have emerged in 1929-1932 and 2008. Both were associated with an economic recession. The first mentioned crisis lasted 3 years and had its catastrophic consequences. The economic crisis, which began on the so-called Black Thursday, October 24, 1929, with a crash on the New York Stock Exchange and eventually became a world crisis within three years. The economy collapsed, with a decline in production. In Germany, the construction of a closed economy began, which gradually transformed in favor of the army and gradually came to power Adolf Hitler.
The year 1950 ended a period of great declines in the world lasting more than 500 days.
According to Václav Pech of the Broker Trust, most bear markets lasted less than a year after 1950, and the only grizzly in the last two decades occurred in 2001. The average bear market lasted 213 days in the period without economic recession and fell by 25 .4 percent. If the bear market ran at the same time as the recession, it lasted 353 days and the market fell by almost 35 percent.
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The second major crisis in 2008 caused the S&P 500 index to fall by 38.49%. The US economy has slipped into recession due to non-performing mortgages. The collapse of the real estate market caused a global financial crisis in September 2008.
Why did the bear come again?
There are several reasons for the bear market. Investors fear a recession at the end of the year. One indicator of concern about the recession is when the yield on 5-year US government bonds rises above 30,
says Raiffeisenbank’s chief economist David Wagenknecht. Investors are also facing rising inflation, an aggressive rise in interest rates globally, a declining profit outlook for companies and, last but not least, persistent geopolitical risks. Neither ‘growth’ (stocks characterized by higher growth than market growth) nor ‘value’ shares (stocks expressing the real value of the company) succeed. The first include shares of large technology companies such as Microsoft, which react relatively strongly to rising interest rates. For ‘value’ stocks, the problem is again the expected slowdown in economic performance,
calculates.
His professional colleague, chief economist at BH Securities Štěpán Křečekbelieves that the emerging bear market can be viewed from a different perspective.
We are now seeing the anomaly of last year’s anomaly, with many markets growing under the influence of doping monetary policy. We are now returning to this anomalous development. If we disregard it, we can say that the markets are returning to levels where we would normally expect them,
presents Štěpán Křeček.
How long can this bear run around the forest?
According to Štěpán Křeček, the mood in the markets is not good. Investors are anxiously awaiting how inflation and central bank action will develop. Newly, they are also starting to worry about unemployment. It is clear to everyone that if people have a job, they will somehow manage to overcome inflation. But when they lose their jobs, there will be an economic hell that could lower the markets even lower. The good news is like saffron, but the markets are looking ahead and the greatest darkness is just before dawn,
encourages Hamster.
At present, there are no prospects for improvement.
The US rate hike cycle is just beginning, it will not start in the eurozone until July, inflation has the potential to rise and the economic slowdown (and possibly recession) is yet to come. I would expect a more lasting improvement only when a series of monthly inflation statistics arrives, which show a reduction in year-on-year dynamics. It will also help if the US labor market remains strong and private investment continues to grow,
says David Wagenknecht of Raiffeisenbank.
It is difficult to compare this period, when the world is rampant with high inflation and the consequences of the war in Ukraine, with another, historically similar. Inflation is certainly a more common issue than a global pandemic. At the moment, the war is interfering in the development of the situation, which does not always necessarily mean an economic recession. According to Štěpán Křeček, on the other hand, it can become an engine of economic growth if production is not curtailed. However, this may happen due to the looming shortage of key commodities.
In all of this, the high indebtedness of states is beginning to show, which is exacerbated by ever-increasing redistribution. No wonder investor sentiment is deteriorating. Nevertheless, I think all the current problems are solvable, and I have no doubt that it will only be a matter of time before US indices reach new highs. But it will take some time,
thinks Štěpán Křeček.
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Historical excursions are not a guarantee of future development, but they show that so far the markets have always recovered.
Long-term regular investors, who still have years to hold their investments, should not be disturbed at all by similar market fluctuations and stick to their investment plan. The declines are an opportunity for them to increase their regular investments and buy ‘at a discount’. Or do nothing at all. The biggest mistake would be to sell securities in a panic and at a high loss,
concludes Václav Pech.
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