Recent Equity Market Losses – Our Thoughts
Today’s news is dominated by big falls in the value of shares around the world and it does sound worrying when one hears that the Dow Jones Index has fallen by 1,175 points overnight.
One of the problems of indices is as they rise, it needs a bigger rise (or fall) to generate the same change in value. If an index is at 5,000, a 1% fall is a loss of 50 points but the same loss (1%) at 50,000 on the index is a 500 point fall.
So, what has happened this year? The Dow Jones index started the year at 24,719 and closed on 5th February 2018 at 24,345, a loss of 1.51% which is hardly newsworthy or unexpected for longer term equity investors.
Shorter term investors (or traders) might have been unlucky enough to have invested when the Dow Jones index hit its highest 2018 value to date when the index closed at 26,616. These investors have lost 7.1%. Serious yes, but catastrophic or unexpected for the asset class? Hardly.
This is newsworthy simply because we are witnessing the return of volatility to a global stock market that has been unusually calm over the past 2 years.
As we said in our December outlook (Tougher Times Ahead) “The past year has been a pretty kind to investors with most markets delivering solid gains against a backdrop of steady economic growth, easy money and low inflation. Looking ahead we expect fewer positive economic surprises and that the rate of global growth will slow from the peak achieved in 2017. Therefore, with equities already discounting the current balmy conditions a period of consolidation or higher volatility looks probable”
The big issue is not the return of volatility but whether this is the start of a new Bear market leading to prolonged and sustained falls in equity values. Whilst we believe that this will only be knowable ex-post (i.e. after the event) our sense is that this is unlikely given that the world is enjoying a period of healthy, synchronised growth.
Our real return portfolios are already positioned for this modest “pro-growth” environment as we have reduced risk to 91% (in a range of 115% - 85%) and hold many defensive assets such as absolute return funds, capital protected structured products and income bearing assets.
Whilst the fall in the US dollar is making imports into America more expensive (inflationary) and US bond yields are rising (which increases the global cost of borrowing) our view is that this is unlikely to trigger a Bear market until yields move well beyond 3%pa. Therefore, we will use this period of volatility to selectively add to positions as a prolonged sell off is unlikely without the threat of recession.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. Investment markets and conditions can change rapidly, and as such the views and interpretations expressed should not be taken as statements of fact, nor should they be relied upon when making investment decisions. We undertake no obligation to update or revise any forward-looking statements and actual results could differ materially from those anticipated by any forward-looking statements.
Past performance is not a guide for future performance. The value of your investment can fall and you may not get back the amount invested.
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