Investment markets will adapt to any situation

If you look back over the last hundred years we have seen some extreme highs and lows in the worldwide economy and worldwide stock markets. Over the last decade we have seen historically low interest rates, difficult economic growth and the banking crisis which brought the worldwide economy to its knees. While things are certainly improving in areas such as the US, how do markets adapt to new environments?

Uncertainty is the biggest enemy

Let’s sit back and think about the situation in more detail, if you have a changing economic environment but you can see where the economy is going then it is easier to adapt and place different valuations on different investments. The real problem comes where there is uncertainty about the future direction of economies and possibly currency issues which we have seen over the last decade. This creates an information vacuum which is very quickly filled by very different views with very different forecasts. The fact is that uncertainty is the biggest enemy of any investor and any investment market.

Investment markets will adapt to any situation
Listen, react and adapt!

Learning to adapt

Whether we are trading in a low interest rate environment, high inflation rate environment or property markets are starting to fall, it is relatively easy to value different types of investment taking into account these factors. When markets experience shocks, such as we saw in 2008 when the US mortgage crisis occurred, they will go through a period of uncertainty but at the end of the day this uncertainty will lift and a whole new investment environment will emerge.

If we look at the US stock market in particular, it is now riding high at historic levels and the UK stock market is also doing very well despite difficult economic circumstances. Indeed earlier this month we saw the introduction of Snapchat in the US which is a technology based company making no money but now valued in excess of $20 billion. How can this be, in these times of low interest rates and limited economic growth?

Market sentiment

You will often hear comments regarding market sentiment which can in theory add a premium or discount to underlying market valuations. You will see time and again markets reacting to a change in market sentiment while the immediate economic situation appears unchanged. Market sentiment is a major factor when companies are looking to come to the market for the first time and much emphasis was placed upon the Snapchat IPO which initially went very well but has since fallen back. Market sentiment can be a fickle lady but if you time your investments correctly you can take advantage of it!

Listen, react and adapt

In theory this is what markets do, they listen to issues, they react and then adapt to the long-term change in environment. To be a successful investor you also need to take a leaf out of this book and learn to appreciate that not all market movements will go as you expect. Sometimes, we as investors, are guilty of maintaining tunnel vision with one eventual goal in mind. The truth is that markets are changing on a regular basis, economies can be volatile and we need to react to what is going on around us – not to how we see it through our rose tinted spectacles.

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