The beginning of February has brought renewed volatility to the US market. We’ve seen, historically, that a market spike is often followed by a sustained period of higher (although not necessarily extreme) volatility, so whilst volatility was expected in 2018, this increase exceeded those expectations by quite some way. The massive sell off of equities in the US caused the S&P 500 to fall by more than 4% while the Dow Jones Industrial Average lost 4.6% in one day. These falls represented the indices’ largest percentage drops since August 2011. Japan’s Nikkei 225 quickly followed suit and tumbled 4.7%, marking its worst fall since November 2016 and taking it down to a four-month low. European and English markets have also seen falls but not to the same extent. The Bank of England have maintained interest rates in the short-term and lifted the 2018 economic growth forecast from 1.6% to 1.8%.
There has been much speculation on the underlying cause of the volatility and subsequent market falls. A period of low interest rates have made equities and riskier assets more attractive to investors and any change in that environment can have a knock on effect on stock valuations. The announcement of higher than expected US wage growth indicated to the market that inflationary expectations may not be as subdued as pricing would suggest. This announcement has coincided with debate on the US budget proposal to raise spending caps which could further exacerbate inflation. The bond market has reacted to the idea that Federal Reserve interest rate hikes could come more rapidly than expected, particularly if inflation does start to rise. Since last Autumn, investors have been betting on the so-called “Goldilocks” economy. This is based, as in the children’s story, on the idea of the markets being “just right”. This is identifiable by solid economic expansion, low volatility and supportive central banks promoting market friendly monetary policy. In periods such as this we would anticipate that investor confidence would grow and this can result in a complacent market structure prone to fracture.
Whilst some heat has been taken out of the equity markets the economic fundamentals have not yet changed, to put this in context despite the recent falls the Dow Jones Industrial Average and S&P 500 are actually both up on this time last year. In volatile markets, it is very tempting to judge the merit of an investment on its potential short-term performance. It is important to remember that investing in the stock markets is for the long term. As always, Adroit maintains its position that a well-diversified, risk appropriate, actively managed portfolio that can react in a timely manner to market movements remains the best strategy for investment in the longer term.
For information about investments, contact Natasha Hellewell at Natasha@Adroitfp.co.uk