Is what we’re seeing on the S&P/ASX 200 Index (ASX: XJO) this week a correction or market crash? Here’s why it doesn’t really matter.
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Yesterday, the S&P/ASX 200 Index (ASX: XJO) made it 2 for 2 in terms of losses for this week so far, recording a 0.66% loss to end the day at 5,784 points. Since reaching a post-March high of 6,148 points on 10 June, the ASX 200 is now down 5.9% from those highs and at a 3-month low. If we keep going in this general direction, the ASX 200 might be looking at official ‘correction’ territory (a correction is normally defined as a 10% drop from the most recent high).
Things seem to be going that way too. The ASX 200 has been in a general downtrend for around a month now. The 6,000 point threshold that I previously described as a ‘rut’ the ASX 200 was stuck in has now been decisively broken. So, is this a healthy correction for ASX 200 shares, or might we be heading for a full-blown market crash (a fall of 20%+) and a new bear market?
ASX 200 shares: Correction or crash?
Corrections and crashes are rather nonsensical terms. It doesn’t really matter a whole lot to anyone if a ‘dip’ is 9.9% or 10%. Yet we give them different names anyway.
Regardless of the terminology, times like this can be scary for all of us investors. Seeing weeks or months worth of gains wiped out is never nice. It’s even less enjoyable to contemplate ASX 200 shares going back to anywhere near the levels they were in March and April.
Still, the moves we have been seeing recently were almost inevitable, in my view. The coronavirus pandemic is unfortunately still rampant, damaging confidence and running a wrecking ball through both the Australian and global economies. Budget deficits continue to climb to extraordinary and unprecedented levels, whilst the economic recovery in Australia is still struggling to get off the ground. We heard this week that Britain might be on the brink of going back into coronavirus lockdown, which has caused UK shares to plummet this week as well.
Add to that extraordinary tensions over in the United States leading up to November’s presidential election, exacerbated by the recent death of US Supreme Court Justice Ruth Bader Ginsburg, and we have a melting pot of uncertainty.
How to invest in this new world
So how does one possibly make long-term investments in this scary world right now? Well, I think the best path is to ignore the noise and focus on the companies you already own or plan to buy. It doesn’t mean much to Woolworths Group Ltd (ASX: WOW) for example, if the ASX 200 falls 1% on one day, what happens in Britain or how the US presidential election goes. If I owned Woolies shares, I would be thinking about how it plans to grow and thrive in a post-COVID world. Same for Afterpay Ltd (ASX: APT), Telstra Corporation Ltd (ASX: TLS) or any other company.
I’m still keeping more cash than usual around in case markets do happen to take a big tumble in the next few months. But I’m also trying not to let the noise of the markets get in the way of keeping the long term firmly in focus. That’s an attitude I think all ASX investors can employ as well, regardless of whether what we are seeing this week becomes a correction or a crash…. or not much at all.
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Motley Fool contributor Sebastian Bowen owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO and Woolworths Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.