Mark Lister: Get used to market rollercoaster

This year has been a rollercoaster for financial markets, especially in the US. Photo / 123RF

This year has been a rollercoaster for financial markets, especially in the US. After the strongest January since 1997, the S&P 500 index abruptly fell more than 10 per cent in early February, putting it in correction territory.

That decline was sparked by signs of stronger wage growth, which markets saw as a precursor to rising inflation pressures and more aggressive interest rate hikes.

Markets calmed down over the following weeks. The January wage growth was revised lower, the Federal Reserve stuck with its 2018 interest rate projections and the S&P 500 recovered most of the losses.

It didn't take long for the next hurdle to emerge, with President Trump surprising markets with an announcement on steel and aluminium tariffs, then more targeted trade barriers firmly focused on China.

Here we go again. US shares suffered their biggest weekly decline in more than two years, and the S&P 500 ended close to the February lows, almost 10 per cent below the January peak.

Since then, a bit of stability has emerged and we've seen a rebound. However, it feels like these ups and downs might be par for the course from here on.

Tighter monetary policy, increasing protectionism, and rising political risk are all threats to global growth. The list of things that could go wrong isn't necessarily any longer than it was before, although we can't count on low interest rates as a safety net quite as much these days.

We also need to acknowledge that at this point in the cycle, markets are priced more highly and bad news has a bigger impact. As the bull market in US shares enters its ninth year, it's only a matter of months from being the longest ever in the post-war period.

For what it's worth, I don't think the recent volatility is the beginning of another 2008-style collapse. For that to occur, we'd probably need to see another global recession ensue. In that regard, there are no alarm bells ringing.

That doesn't mean we shouldn't be worried though. These moves could well be a sign of things to come, and are a timely wake-up call for some investors. Volatility has been exceptionally low in recent years, and those who are relatively new to investing in shares could be in for a shock as things normalise.

For many investors, the turmoil needn't trigger a change of approach. Owning shares in quality businesses remains a great strategy for wealth creation, not to mention inflation protection. While disconcerting, periods of volatility and weakness are simply the price we pay for superior long-term returns.

People in the "accumulation phase" of their investing life cycle shouldn't be bothered by what we've seen this year. This goes for anyone with no need to draw on their savings for 10 years plus, including those in KiwiSaver growth funds.

In fact, those investors should be hoping for even more turbulence in financial markets. In hindsight, the KiwiSaver contributions people made in 2009 and 2010 turned out to be some of the most astute buying anyone could've done.

However, you'd be wise to reconsider your strategy if you'll need to call on your money in the near future. If you couldn't ride out a temporary hit to your capital, or if you're saving for a house deposit, maybe it's time to take some risk off the table.

- Mark Lister is head of Private Wealth Research at Craigs Investment Partners. This column is general in nature and should not be regarded as specific investment advice