Just try not to panic

THE strong rebound in the US sharemarket in the week leading up to their Thanksgiving long weekend saw renewed talk of a possible bottom forming in equities and a view that the worst is over.

That enthusiasm has been short-lived as the sharemarket rollercoaster returned last week in reaction to a string of appalling figures in the US, Europe and even China. It's weird how the US declares itself in recession on the back of a pronouncement from a panel of economists and even then they conclude the economy has been in recession for a year. What the?

While other countries use the traditional definition of a recession as two consecutive quarters of negative economic group, the US leaves it up to the National Bureau of Economic Research to decide.

It just stuns me that a bunch of boffins make the decision and then have the nerve to say it's been going on for a year. Talk about being absolutely useless to politicians, regulators and businesspeople wanting relevant information on which to make timely decisions.

The only good thing about knowing the US recession has been going 12 months is that we could be closer to starting the recovery process than we thought (the traditional length of an economic downturn is 17 months). But that could be just wishful thinking.

The key is keeping everything in perspective. We are bombarded with so much information it's easy to panic. As I've said before, markets and economies run in cycles. Every boom ends in a bust and every bust is followed by a recovery.

For those still searching for a market bottom, this chart puts the US sharemarket performance into perspective. Remember, our market seems to be a slave to US movements so future trends are likely to be reflected here.

The chart ranks the performance of the S&P 500 index, which tracks the share performance of America's 500 biggest companies. So far this year, the S&P has recorded its worst performance in the past 183 years, including in 1931 towards the end of the Great Depression.

For all the wrong reasons 2008 will go down as a historic year but the chances are it won't be repeated next year. As it stands, history tells us next year is unlikely to be as disastrous - there could still be falls but not as bad.

In 1931 the S&P dropped 40 per cent to 50 per cent followed by up to a 10 per cent fall in 1932, a 50 per cent to 60 per cent rise in 1933 followed by another 0 per cent to 10 per cent drop in 1934.

On average, 70 per cent of the past 183 trading years have produced positive returns.

That famous crash of 1987 was a little weird because, despite the crash in October, the S&P was only down 0 per cent to 10 per cent for the year overall. In the years either side the S&P was up 0 per cent to 10 per cent overall.

Despite the daily to monthly volatility of the markets, stepping back and taking an annual view smooths out the performance.

It is the most relevant view for most private investors because we tend to take a medium- to long-term view and invest in quality stocks.

But it's human nature to be attracted to drama. So when there is a sharemarket plunge we follow it day by day and get panicky when things continue to deteriorate.

Markets reflect investor sentiment and psychology and become panicky when we become panicky. Try to break the cycle. Take an interest, of course, but keep it in perspective rather than get sucked into the drama.