Stop Press – Recent Market Volatility

As the end of 2017 approached, many were suggesting that 2018 could see a return to more unstable markets. With the bull market in full swing and volatility at record low levels, there were signs that a level of complacency had crept into some investors.

The recent falls in the US and Asian stock markets will have surprised many with their severity, not least because the S&P 500 Index saw its largest single-day fall since August 2011 while the VIX (the volatility index) saw its largest one-day rise in history.

The trigger point for this sell-off seems to be the recent US payroll data, which came in strongly ahead of expectations. With the US economy growing strongly, there are fears that the Federal Reserve will have to raise interest rates faster than had previously been expected. With three rates rises in the US in 2017, and three more earmarked for 2018, incoming Chairman of the Federal Reserve Jerome Powell may be in for a challenging time.

The increase in interest rate expectations is not because of systemic risk or a policy mistake, but because economic growth is stronger. This is good news. US Interest rates are still low by historical standards and inflation has not yet moved higher – it is still close to 2%.

What we are experiencing is a correction which is well overdue; we have had 13 straight months of positive gains, at extremely low levels of volatility. This is very unusual. This was the first time since 1927 that the US market has not experienced a correction of 10% or more in a 12 month period. Sharp declines are often followed by equally strong and powerful rallies – Technical selling at the close of the market (computer driven trading) have almost certainly exacerbated the decline.

These are not exceptional market movements, only newsworthy because they are perhaps long overdue in the normal scheme of things.

The fundamentals are still solid:

Global economic growth is strong – as the International Monetary Fund noted recently, this is the strongest synchronised global growth upswing in over a decade. Global earnings generated by companies remain strong and continue to deliver double digit gains.

Economic growth could still benefit further from fiscal stimulus, likely infrastructure spend and tax cuts and decreased regulation in the US.

Market corrections can be healthy and help to remove a degree of investor complacency from markets. They serve to remind us that positive returns and one-way markets are not the norm, corrections bring opportunities to re-position portfolios and reconsider investment objectives.

When investment markets are volatile, managing our own behaviour is what makes the difference to long-term results; we can allow fear to cause us to sell once markets have fallen, turning paper losses into real losses, and then wait for markets to recover before re-investing the cash.

Having a well-diversified portfolio softens the blow of any short-term volatility in equity markets, as you are never fully exposed to UK, US or global stock price movements.

However, it is only natural that market volatility prompts some nervousness. If you’re feeling at all unsettled, please call us and discuss your concerns – that’s what we are here for.