Long-Term Investors Will Benefit from this Week's Crash

Monday’s markets meltdown was triggered by China’s benchmark index plummeting by 8.5 per cent.  Markets in Australia, Japan and South Korea then echoed events in Shanghai.

That prompted similar reactions in Europe and the U.S.

The sell-offs were considerable on so-called ‘Black Monday’ and the volatility continued in Tuesday’s and Wednesday's trading.

There are several key motivations behind this week’s crash.  

The main drivers are, of course, the real and justified concerns about China’s economy – the world’s second largest – and how its slowdown will create not only domestic economic problems but how it will adversely impact the rest of the world.

However, there is a weighty argument to be made that this week’s events will prove to be timely indeed for long-term investors and the global economy for two key reasons.

First, the markets were, in most cases, overdue a correction.  If we look at the U.S., for example, there have been sustained periods of relatively low volatility and stocks went into their seventh ‘bull’ year in May.  

The average bull market is eight years.  If you’re looking over the longer-term, as opposed to a day-to-day perspective, you could see a correction would be overdue.

Bear markets typically last nine to 18 months.  This is why long-term investors would be wise to keep buying in a measured and strategic way, and not panic-sell, as by the beginning of next year we are likely to start seeing the back of the bear market.

Second, I believe that the events of this week will prove to serve the global economy well in a wider context.  This is because the Federal Reserve and the Bank of England are now less likely to raise interest rates this year and when they do raise them they are likely to be more cautious.

Raising rates could have a host of dangerous consequences.  They could encourage further deflation, make it more expensive for firms to invest and create jobs, and, of course, it would strengthen the dollar - and a strong dollar is bad for U.S. exports and global growth.”

Fortunately, the Bank of England and the Fed now have time to evaluate if an imminent interest rate rise is necessary. If the Chinese stock market had fallen after any interest rate rises, the fallout could have been much, much worse.