I know what you’re thinking. Don’t!

The heat is on. Big selling lately. But…

It’s times like this we need to keep a cool head.

Do we have anything to take heart from, right now? Well, maybe. Fund manager Auscap did a webinar last week.

They shared this handy chart. It compares the Aussie and US share markets and their valuation.

Check it out…

The US stock market is in yellow and the ASX blue.

Clearly, US stocks were up at lofty levels , and still are.

But you can see the ASX never got anywhere near the same extreme, and hasn’t for years.

It seems unlikely we’d fall precipitously from here with this in mind.

I’m not saying we’ll go up today, tomorrow or next week. We’re in a tricky moment.

That said…

The hardest thing ,when the market sells off, is not to extrapolate the price action too far.

Shares are volatile, and we live in unpredictable times.

My expectation?

Fund managers should move to take advantage of the current volatility.

See above. They’ll have some confidence they’re operating within the bounds of ‘normal’.

The media will do a good job of spooking you, as it always does.

The share market is in its worst start to the year since Covid, reported the Australian Financial Review yesterday.

I remember a similar stat going around in 2016, funnily enough. It was the worst start to the year in the Dow ever…and that was in the first week!

One known market bear said US stocks could fall 75%, at the time.

That didn’t happen.

And you know what?

The wealth creation opportunities since have been staggering.

2016 was a long time ago now. I certainly had less grey in my beard then.

But you see my point, right?

These type of sell offs happen regularly…if you stick around long enough.

Then the media trots out some doomer to forecast more doom, the clicks go up…and in 12 months we’ll probably be talking about something else.

That said…

How to handle current events right now?

The easiest thing – and probably the smartest - is to do nothing.

Study after study has shown investors are their own worst enemy.

Every sell off, recession, spook or bout of volatility is an excuse to go to cash and play it safe.

Over time the stock market makes fools of those who are prey to this.

But you could have said that in 1929, too, right?

Here’s some help on that…

One way to test the level of market risk is via the credit markets.

If US corporate bond investors think we’re on the edge of a big recession, they’d be demanding higher rates.

Analysts over at Stanberry Research checked in on this recently. You’ll like what they found.

 Brett Eversole writes:

“The chart below shows the high-yield bond spread – that is, the difference between the yields on high-yield bonds versus risk-free U.S. Treasury bonds. The spread tends to spike when a recession is on the way. But as you can see, that hasn't happened…

“We'd need to see it spike above 4% or even 5% before we started to worry.

“If that happened, the bond market would be confirming our worst fears... that a recession is imminent. And it could cause the current correction to plunge into an all-out bear market.

“But that signal isn't here yet. And until it shows up, we should assume we're working through a painful air pocket, nothing more.”

In other words, shares are volatile. Get used to it. Bond investors aren’t panicking. Neither should you.

 Now, for the risk takers and adventurous…

Personally, I don’t mind buying on market weakness as long as I’m buying into industry strength.

It’s cash flow and earnings that drive stock prices over time. Look no further than the standout sector of the ASX in the last 6 months: gold, gold, gold.

The Aussie gold price is a barnstorming $5000 an ounce. That’s huge! The gold bull market can keep surging while this continues.

I also expect a wave of mergers and acquisitions to sweep over the sector. In fact, it’s already started with Ramelius moving on Spartan Resource recently.

There are likely plenty more gold buyouts coming up. That should put your spotlight right on the junior gold space. 

Best,

Callum Newman,

Fat Tail Daily 

You can follow me each day at Fat Tail Daily.