February 14th 2018
Markets have performed extremely well over the last 8 years. The longer the market run lasted, the greater the probability that a correction would occur. In that context, while not necessarily welcome, such a correction was anticipated. In this article we discuss what has recently happened and what actions are recommended.
In summary, what is causing the recent market weakness? Global stock markets have fallen around 4/5% in recent days and volatility has risen significantly. There are three principle reasons why.
1) Inflation fears: US wage data released last Friday was higher than expected which caused US bond prices to fall and yields to rise.
2) Technical trading: traders who chart technical levels in global stock markets will buy or sell when markets hit certain levels, regardless of fundamentals. The US stock market hit those levels late last week and triggered sales. This has been exacerbated by a spike in the volatility index (VIX) causing further technical sales.
3) Stock markets have been on a strong upward run for some time. In fact, they were only 4 days short of the longest period without a 5% correction. It is not unusual for markets to correct from time to time and such corrections are typically less than 15% in magnitude and short term in nature.
Market Volatility Update
• Volatility in stock markets is perfectly normal but has been very low for some time.
• To put the recent weakness in context - markets were only 4 days short of the longest period on record without a 5% correction. In other words this pullback is not unexpected.
• Short term volatility can cause uncertainty and tempt investors to ‘do something’. In recent years, the best solution has proven to be well diversified and stay invested. Getting out of the markets is easy. Much more difficult to time the correct time to re-enter.
• It is best to invest in a risk controlled fund (or funds) that reflects your personal risk appetite. These funds are typically well diversified, invested in many different assets, sectors, geographies, strategies, managers and currencies.
• Many active Fund Managers will use the correction (market volatility) as an opportunity to increase equity holdings at reduced prices. This underpins the greater view that this is not a fundamental markets issue but rather an expected market pull back that is within the expected tolerance.
While it is expected that volatility will return to markets, equities are the favoured asset class due to fundamental economic growth and it is probable that equities are still the preferred asset class particularly in times of short term weakness. This continues to be the case.
Impact on Major Markets
o Stock market is down c.7/8% over the last week
o US bond yields rose but have recovered somewhat
o Currency largely unchanged vs Euro
o Equities fell by 5%
o UK stock market down c.5/6% over the last week
o Currency slightly stronger vs Euro
o MSCI ACWI down 4/5% over the last week
o Volatility is typically measured by the VIX index. It has risen from circa 13 to circa 37 in the space of a week. The long term average is around 22.
If you have any questions or would like to know how the recent correction has affected your investment, please do not hesitate to make contact with us on firstname.lastname@example.org or on 071 919 4000.
Please note market circumstances may change quickly and all views expressed here are on the basis of information available at the time of writing. We will keep you informed of our views as and when events unfold.