When the ghosts start haunting us
On August 24, the local equity market had its 3rd largest one-day decline in the past decade, falling by as much as 6.70%. It was bloody, and the whole world was seeing red. The sentiments were worrisome and pessimistic.
Most people thought the Chinese ghosts are haunting us.
What is the ghost month?
In Buddhism and Taoism, the ghost month, better known as the Hungry Ghost Festival, is a time of honoring and making sacrifices to the deceased; and appeasing the hungry ghosts. It is this time that they roam the land of the living when the Gates of Hell are opened.
The festival follows the lunar calendar; and starts on the 15th day of the 7th month and runs for a month until the last day of the 7th lunar month. This year, the ghost month started last August 14 and will end on September 12.
For the Chinese, this is considered an ominous time. Among the taboos are no weddings, no moving in to a new home, and no travelling (or at least minimized). Any financial decisions are also put on hold including opening a business; or doing other investments.
Given that, many attribute this to the weakness present in the stock market. But is there a correlation between this period and the rise or fall of the stock market?
The answer: No.
What happened during past the past ghost months?
As fate would have it, it was China triggering these massive sell-offs. Reeling from the slowing economic growth and falling stock market, the People’s Bank of China had decided to devalue its yuan against the dollar.
For an exporting country, this is advantageous as a weaker currency is competitive for exports. This means that an importing country needs to shell out less to buy their goods.
When more demands come in, more production will be done, thus stimulating the economy even more.
Putting all these things together, the paranoia is that these events were because of the ghost month. Truth is there is no direct or indirect effect of the ghost month and the decline.
In the past 5 years, the years 2011, 2013 and quite obviously this year all have registered negative returns during this period. The years 2010, 2012 and 2014 generated positive returns for the equity market. One can deduce that even years are positive and odd years are negative. It is more of a coincidence than a probability.
Statistically, the average return for the past 5 years during ghost month is 0.8%. The worst year was 2013 when the market fell by 6.8%. The best of the 5 years was 2010 when the stock market gained by 7.9%.
Here’s the interesting part: The average gains two months after the ghost month for the past 5 years is 4.81%. And if you have been in the market already when the festival started, don’t fret because the average gain is 5.09%.
How will this year follow? It’s still difficult to tell. The end of the festival is on September 12, and that is still a good two weeks away.
What should you do now?
Keep in mind that this isn’t the first time (nor will it be the last) that markets behave like this.
Volatility is ubiquitous. All this means is that the market will rebound after a certain period. Have faith. It will rise again. Nobody just knows when. But the sharper the decline, the faster the rebound is. There is a 17% gain just for the index to go back to its previous high.
If you are already doing cost-averaging – that is, investing regularly regardless of whether its high or low – continue doing so. This isn’t the time to abandon this. On the contrary, adding more to your positions now won’t hurt either. Be cautiously aggressive. It doesn’t matter whether it’s direct in stocks or in pooled funds.
Blue chips are hard hit this time. They present some buying opportunities. Their current share prices are definitely not a reflection of their businesses.
Some would even argue that this is catching a falling knife, and when you catch a falling knife, you end up getting hurt. There is some sense into that, but I would rather heed the wisdom of Warren Buffett when he said: "Be greedy when others are fearful; and be fearful when others are greedy."
Right now, there is some fear in the market. – Rappler.com