Stock markets have been up to their old tricks lately.

You know what they say on Wall Street…

They say the markets try to inflict the maximum amount of pain for the most investors possible.

They draw them all in… and then give them a smack.

It happens every so often. It’s the ugly end of the market cycle.

Are we there right now?

More pain to come

Well it’s not got REALLY ugly yet (despite the shock headlines in some of the media).

But it’s certainly a lot less rosy out there than it was a couple of weeks ago.

And it’s times like this when people start to think about where else they might want to stash some of their hard-earned money…

… just in case this current market correction turns into a full-on rout.

And given how far the market has risen over the past nine years, that’s a distinct possibility.

If the market really decides to punish care-free investors, there could be a lot more pain to come.

A warning from the old-hands

When I first got interested in the markets, it was at the height of the roaring bull market of the 1990s.

I didn’t know it then, but there wasn’t that long for the bull to run.

OK, some of the old-hands I was working with at the time (who’d seen it all before) were predicting the good times were about to end…

They said the writing was on the wall. That valuations didn’t make sense. The market was overstretched… and overdue a correction.

But as a newbie to the world of financial markets, I couldn’t see it.

It seemed like shares could only go one way: up!

Who were these miserable doom-mongers who were trying to spoil the fun?

Why were they urging people to get the hell out of stocks… and into gold?

Now, with twenty years’ market watching under my belt, I’ve seen how market cycles work.

And how boom turns to bust.

And I understand that the guys calling the top of the market back then were the smart guys (even if they were a couple of years early!)

Sign of a coming crash?

I’m more sceptical these days…

When markets keep going up and up and all around, people are chucking their money in without a care in the world…

That’s when I want to take the other side of the trade.

And like those misery-guts who were sounding warnings when I was first starting out in ’98, right now I’m more inclined to be cautious.

We’ve been making that point in Monkey Darts these past few months…

That when investors are so complacent about market risks, they’re in danger of sleep walking to financial ruin.

And in the past week, markets have fired their own warning shot across investors’ bows.

Yesterday the Dow Jones fell 1,032 points or 4.15%.

And that’s its second 1,000+ point fall in a week.

These aren’t huge moves in percentage terms when you take them individually. We’re not in full-on crash mode for stock markets – yet.

But from the recent peak at 26,616 on 26 January, the Dow’s now dropped 10.3%.

It’s not a crash.

But it’s a correction all right. And an overdue one.

What we’ve been waiting for

And it’s not been unexpected as far as you and I are concerned, has it?

We’ve been expecting it.

We knew it was only a matter of time before something spooked investors.

And as we discussed in Monkey Darts last week, it was probably going to be talk of rising inflation and rising interest rates.

Which is what we’ve got now.

Apparently, the US economy is doing well.

But it’s doing too well!

Unemployment’s falling.

Wages are growing more than expected.

And that’s got people betting that will lead to rising inflation… and faster rising interest rates.

I read earlier that some US central bank members are now suggesting there could be 4 or 5 rate hikes this year, rather than the previous consensus of 3.

On the one hand that’s the sign of a strong economy. (That’s certainly President Trump’s mantra!)

On the other, higher rates means higher finance costs for both consumers and businesses.

That’s bad news for companies… and for stock markets.

And when you’ve had such a long period of relentless advances in markets as we’ve just had (the second longest in history), the correction must come eventually.

Just like it did when the 1987-2000 bull market ended.

New millennium bust

Were you around at that time? As in… were you interested in the markets?

If you were, you probably remember it well.

This was boom time for stock markets. Everything was going up.

British investors were mad for investing in shares.

They had been since the 80s when the Thatcher Government started privatising utilities like electricity and telecoms.

Until then, share ownership was for the City elite and the rich.

People with family money handed down. Intergenerational wealth.

Maggie’s big idea was to get the little guy to own shares – to experience capitalism themselves and see how they could make money by investing in free enterprise.

‘Popular capitalism’, she called it.

And once they’d tried it – and made money – in those early privatisations, they got the taste.

According to Kenneth Baker, an MP in that Tory government: “This changed popular perceptions of the accessibility of share ownership: When we came into office, there were about three million people who owned shares in Britain. By the end of the Thatcher years, there were 12 to 15 million shareholders.”

And by the end of that bull market, everybody wanted in.

Crazy things were happening.

Like a TV game show where teams picked shares. The teams whose shares went up the most over the week won!

It only lasted for two series before the market crashed…

We’re not there yet this time. So far, this is merely a correction. That’s what a 10% drop from the peak is categorised as.

What makes a bear market? That’s when you get a 20% drop from the peak.

If you want a number to keep an eye on, it’s 21,292 on the Dow Jones. That’s the level that says we’re in a bear market…

That’s when the market really starts inflicting the pain.

What really makes money?

I was talking to Monkey Darts publisher, Nick Laight, about this.

And we decided we should look at what’s been the best way to make money over the long term.

When you talk about investing, typically you think of the stock market and shares, don’t you?

But there’s a whole bunch of other places you can put your money to work.

The ones that spring to mind are bank/building society accounts (i.e. cash), property and gilts (government bonds).

Those are the ones that are typically mentioned when you talk about long-term wealth generation.

But you can also make money in commodities like gold and silver, antiques and art, classic cars, stamps, whisky and wine.

OK, some of those are probably things you’d never consider! But who knows, perhaps you should.

I’ve been collecting data on this. I’ll see what conclusions we can draw about where the best places are to grow your wealth over the longer term.

I’ll be back next Friday – have a great weekend.