Debunking Some Myths About Markets

When it comes to financial markets, there are many prevailing myths that can mislead investors. Recently, Adriaan Pask, the chief investment officer at PSG Wealth, identified a few common myths that are particularly relevant today. Let’s explore these myths and uncover the truth behind them.

Myth #1: SA Financial Markets Are Underperforming US Markets

This is a common belief, but it’s not entirely accurate. Pask argues that the FINI Index, which includes the 15 largest financial companies (and REITs), provides a better reflection of South Africa’s economy than the JSE ALSI.

Banks in South Africa are thriving as demand for credit increases. Interestingly, bank earnings have not kept pace with the rise in share prices, suggesting that shares might not yet be overvalued.

To put things into perspective, the FINI15 has outpaced the S&P 500 since 2020. While the S&P 500 has risen by 75% since October 2020, the FINI15 has soared by 122% when both indices are converted to ZAR.

Myth #2: US Markets Always Rise When the Federal Reserve Lowers Interest Rates

This myth is particularly important now, as the interest rate cycle has shifted. Investors might hesitate to reduce their exposure to US stocks following Fed rate cuts. However, history suggests this belief is unfounded.

During the Dotcom bubble and the 2008-2009 global financial crisis, the Federal Reserve had already begun aggressively cutting rates, yet this did not prevent the market sell-off.

The following charts demonstrate what happened during the Dotcom bust and the 2007 global crash, and indicate what may occur in the coming years.

Myth #3: The US Dollar Always Strengthens During a Market Sell-Off

Although you often see the US dollar strengthening during the initial panic phase of a sell-off, the reality is more nuanced. Research shows that correlations are cyclical, and at times the dollar is positively correlated with the market.

For instance, in 2002, 2008, and 2018, the dollar weakened even during a market sell-off. Over the last 24 years, the dollar was positively correlated with the S&P 500 more than 40% of the time.

According to Pask, while the dollar remains a good diversifier, markets are cyclical, and so is the dollar. A tactical approach to diversification is essential, especially during significant market events.

In conclusion, many financial market myths stem from oversimplification. It's important to critically analyze market behavior and adopt a well-researched, diversified investment strategy.

Ciaran Ryan