Riding out the storm

Stock markets may have seen volatility of late, but it is not the time to act in haste, says Chris Price, Investment Specialist at investment management and stockbroking firm Redmayne Bentley.
 
Chris said: “Following a strong performance in 2017, global equity markets began 2018 in a similar vein, reaching a series of new highs in January. However, markets fell back sharply in the first half of February, as inflation fears, in particular, halted progress, although they remain at historically high levels.
 
“The long market bull run has been a reflection of the optimism of improving global economic conditions, while recent US tax reforms have added a further positive message for corporate earnings. This improving economic environment has, however, awoken investors’ fears of rising inflation and the actions that central banks will have to take to counter that.
 
“Strong US jobs and wage growth figures in early February led to a sharp rise in bond yields on concerns that the Federal Reserve (Fed) would have to raise interest rates faster than most analysts had forecast. UK markets were further jolted following the meeting of the Monetary Policy Committee, which signalled that UK rates are likely to go up sooner than expected.
 
“It is no surprise in this environment that equity markets have been impacted. While improving economic conditions are a positive for corporate earnings, higher interest rates push up the cost of borrowing, which will reduce profitability. Stock markets tend to be a reflection of the future economy, rather than today’s, so heightening concerns about factors such as rising interest rates and inflation will be shown in current market performance. Therefore, the Fed will have to show that its policies will not let inflation run away, although the current US administration’s policies, such as the recent tax cuts, could also influence markets.
 
“This market volatility has been exacerbated by a number of strategies employed by investment houses betting that volatility would remain benign. The most common measure of volatility is the Cboe Volatility Index, or VIX, which is the expected volatility of the S&P 500 index over the next 30 days. This index rose over 21% on Monday 5th February, which effectively caused two exchange-traded products to collapse. The major US indices have fallen by at least 10%, which analysts term a “correction”. Analysts remain sanguine, arguing that this type of correction is normal and that this does not suggest the advent of a bear market.
 
“The outlook for markets is that 2018 won’t be a repeat of the fairly serene progress made in 2017, but of a far more volatile environment. Recent events are newsworthy due to the size of the moves, but daily market performance shows that the market is down almost as often as it is up, although a good year is three times more likely than a bad one. Therefore, reacting to daily events is likely to cause unnecessary panic as well as impact on an investors’ performance, especially as the current market uncertainty may persist for a while. A study in the early 1990’s by Barber and Odean found that investors who traded less made more money than those who actively traded. Ultimately, it reemphasises that investing is a long-term process and, if you adopt this approach, your portfolio in ten years’ time would be expected to be worth more than it is today.”
 
Please note, investments, and income can fall as well as rise in value and you may lose some or all of the amount you have invested.