Bear Country

Current market conditions have many investors and commentators nervous, as it seems more and more likely we are heading out of bull market territory and into bear country.

 

So what is a bear market? And what are the factors contributing to the current economic climate?

 

In simplest terms, the phrase 'bear' is used to describe a market in decline, marked by falling share prices over a period of time. By contrast, a bull market describes a market being pushed up, with share prices on the rise.

 

There are many legends surrounding the origin of the terms, but the simplest way to remember is that a bull attacks by tossing its horns upwards and a bear by swiping its paws downwards.

 

In the last few years we've gotten used to strongly performing equity market, which had all the signs of a bull market.

 

And now it seems the market isn't just correcting, or returning to more neutral conditions. It appears more likely that we have entered a pessimistic bear phase.

 

Influencing factors

 

The main factor influencing global markets at the moment is the impending US recession, the so-called 'credit crunch' and the resulting adverse impact on investor sentiment.

 

A recession is a period of negative economic growth. They are part of the normal economic cycle, and the last two US recessions, in 1990 and 2001, were also global recessions.

 

Currently, while other countries are feeling the pinch, the US seems to be faring worst, slipping into a recession on its own.

 

The first sign of frailty in the US came when housing prices slipped to record lows.

 

This was compounded by the sub-prime mortgage crisis, where risky lending practices from banks led to mass loan defaults.

 

To make matters worse, these mortgages had been grouped together and on-sold as investment products on the global market.

 

When the loans defaulted, many major financial institutions were burned by having bought the mortgage-backed investment products.

 

This led to tightened lending practices from the banks, which created a liquidity crisis as with less money available to lend, there was less opportunity to invest.

 

With less business activity, the ailing US economy further flagged; pulling local and global markets down with it.

 

 

What does the future hold for the Australian market?

 

So far, Australia has been relatively protected from the US woes - mainly due to our close links to the still-thriving Asian economies, and the ongoing mining and resources boom.

 

However, at the end of 2007 and early 2008 Aussie share prices began to take a larger hit.

 

Investors could be forgiven for being a little worried when receiving this year's performance reports, especially in contrast to the recent climate of record returns.

 

Some believe, though, that the US recession may actually be a good thing for ongoing market conditions.

 

The bear market is likely to be a period of reflection into what is a realistic, sustainable approach to investing.

 

Keeping your cool in an overheated market

 

So with all this in mind, what should investors do?

 

A these times, it's about being loyal to the investment basics and not overreacting to volatile markets.

 

Making the right decisions is easier if you:

 

- Know your risk tolerance. It's a simple equation: the higher the risk, the higher the potential return. However, if you're not prepared to weather the highs and lows, perhaps a more conservative investment approach is right for you.

 

- Be aware of your time horizon. It may be worrying to hear of lower performance returns now, but when are you going to spend your money? For most of us, it's in retirement which may give plenty of time to recover from market volatility. If retirement is sooner, you may need to work with your adviser to readjust your strategy to incorporate more defensive assets, such as cash or bond funds.

 

- Finally, remember that diversification is essential in an uncertain world. The more genuinely different baskets you have your money in, the better.

 

This article is intended to provide general advice only, and has been prepared without taking into account any particular person's objectives, financial situation, or needs. Before acting on the advice, you should consider its appropriateness for your own circumstances. This is best done with the assistance of your financial adviser.