A question on people’s minds at the moment is ‘Are we about to experience a stock market downturn?’ given the length of time we have been in a ‘bull market’ and also in light of the uncertainty regarding Brexit etc. Here we discuss the key findings within our domestic and the international economies and what this could mean for investors.
- There has been an interesting interplay recently between inflation, wages, interest rates and sterling. Inflation has been edging higher since deflation was a threat in 2015. Therefore, the combination of rising inflation and weak earnings growth means that we are feeling the squeeze at present.
- The recent rise in sterling indicated that the markets feel that ‘rock bottom’ interest rates are coming to an end. However, with inflation rising and the ‘real’ value of money reducing, it is likely that we will remain in a ‘low interest rate’ environment for some time
Europe & the Rest of the World
- 2017 has delivered a sequence of reassuring election results in Europe. France, Holland and more recently in Germany, which have steered clear of ‘right wing’ extremism.
- Geo-politics remains unstable however, where the standoff between American and North Korea shows no signs of abating.
- In these times investors often look for a safe haven and ‘Gold’ has seen a rise during 2017.
The Markets – what can we expect
- We are more than 8 years into a ‘bull market’ and it is reasonable to think that we may be near the ‘top’. Share prices have been rising without any meaningful correction for longer than some other bull markets in the past.
- If we enter a ‘bear market’ (downturn in the market) what does this mean?
- First, there are cyclical bear markets which are caused by rising interest rates, impending recessions and falls in profits.
- Secondly, there are structural bear markets which are caused by imbalances and bubbles and often come before times of deflation.
- Thirdly, there are event driven bear markets which are triggered by outside influences such as wars, oil price shocks and emerging market crises.
- So, whilst a correction (bear market) may be around the corner, it may not be all that bad. We have had a very low level of inflation since the financial crisis. If inflation remains low, monetary policy can remain looser (the actions of the central banks to control the flow of money in the economy) and interest rates may not need to rise too much. This would mean that recession is less likely, and a cyclical bear market therefore would not be imminent.
- Furthermore, the post financial crisis financial regulation imposed has led to less borrowings amongst banks and companies. This makes a structural bear market less likely.
- The event driven bear market by its very nature is an unknown.
- We could therefore see a period of low returns rather than a bear market. However, if inflation does rise further causing higher interest rates, it is very likely that we will experience a bear market and a correction / downturn in the stock-markets.
The Service we provide for our clients
- As always, we believe investors should remain focussed on the medium to long term, investing over ‘time’, rather than trying to ‘time the market’.
- Through our research at Loughtons, supported by the expertise of Morningstar, we focus on the intrinsic value of a particular asset. We continue to assess the quality of any investment opportunities which come about as the result of our investment process and strict fund selection criteria. A long-term outlook when investing is clearly desirable, as short-term expectations can turn out to be unrealistic where events cannot be anticipated.
- Therefore, active management remains important and generally volatility can be partially mitigated by diversifying investments across a broad range of asset classes that include equities, commercial property, fixed interest securities (bonds) and cash to spread risk even further.
- We will always look to ensure that clients have a portfolio that reflects their requirements which is based on their attitude to risk and capacity for loss, whilst considering what the impact the current stage in the economic cycle has on the exposure to various assets.
For clarification of any points discussed above and any future independent advice regarding your own financial planning, please do contact us on 01626 833225 or email firstname.lastname@example.org
The views and opinions contained herein are those of Loughtons Independent Financial Advisers and may not necessarily represent views expressed or reflected in other economic communications, strategies or funds.
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