Are the sharemarket wobbles anything to worry about?

It seems the International Monetary Fund shares my uncertainty around the sharemarket.

Earlier this month when the Australian sharemarket touched a record high I admitted I was nervous. Was it “peak greed”, with markets getting too hot on the back of irrational optimism?

On Wednesday the International Monetary Fund shared my uncertainty.

I’m old enough to have seen enough sharemarket crashes to be spooked in these situations. In the two weeks since that record high the market has contracted a dose of the wobbles. Most likely due to Iran’s decision to get involved in the Israel/Gaza conflict, plus uncertainty over whether US interest rates will fall by as much and as quickly as expected.

That sharemarket euphoria of just two weeks ago has taken a more sobering tone. The IMF has warned that the downward trend in inflation looks to have stalled, which means expected rate cuts in the US and Australia will stall as well.

IMF warning of a correction

The IMF is warning asset prices will fall because of a disconnect between markets and economic fundamentals. When they talk asset prices they mean share and property values. And the IMF is warning of a correction.

Basically the IMF reckons that markets are not acknowledging the delay in rate cuts and the impact that will have on economies and company profits.

The world’s most prominent investor, Warren Buffett, once said “be fearful when others are greedy and be greedy only when others are fearful.”

Investment markets move in cycles

The rationale is that when others are greedy, prices for investments typically boil over and investors should be cautious as they are likely overpaying for an asset. Buying at the top of the market usually leads to poor future returns as values inevitably pull back and readjust to a normal valuation.

But at the bottom of the cycle, “peak fear”, investments are massively undervalued and underappreciated by investors. As Warren Buffet said in his biography, Snowball, “Cash combined with courage in a crisis is priceless.”

Remember investment markets move in cycles. Every boom will end in a bust and every bust will end in a recovery. The timing of these movements is the unknown because markets are driven by the emotions and psychology of those people operating in them.

I’ll keep watching to see what happens.

This is an edited version of an article first published at The Nightly.

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