It has no doubt not escaped your attention that the political agenda both in the UK and in the US has at times been febrile of late. Much like the weather here in the UK, the political climate has also been stormy and inclement.
This has reflected in market volatility across all developed and emerging markets.
On Tuesday, with concerns around the inversion of the bond (fixed interest) yield curve, which usually points to a recession, the Dow Jones Industrial Average fell sharply.
It is true that markets hate uncertainty and with the lack of clear traction in the political agenda in the UK relating to Brexit and the increasing tensions between the US and China, which represent around 40% of the world’s GDP together with a slump in oil prices (Brent Crude) from US$85 per barrel in October to the lows of $60 per barrel now, this has provided the conditions for a perfect storm in markets.
US China Trade Tensions
One can observe that the increase in tariffs on Chinese goods by the Trump administration, with its protectionist ‘America First’ agenda, has in fact has increased the costs on those goods to American consumers, so in fact this policy has been counter-productive. China will not be bullied and has responded accordingly, resulting in increased tensions despite the handshakes and smiles published in the media recently. The market is not convinced and wants to see a genuine cessation of advancing measures by the Trump administration with this policy before it will breathe out.
End of the Bull Market?
For some time, it has been muted that we are at the end of the long bull market which grew out of the financial crisis of 2008. In fact, markets have simulated a smooth passage with significant returns being evident in the 10 or so years since the crisis broke.
Federal Reserve Monetary Policy
However, with the US generally calling the tune to which the rest of the developed world dances, the death of the bull market is in the hands of the US Federal Reserve (the Fed). Whilst there is much noise domestically regarding Brexit and internationally regarding trade tensions between the US and China, a significant concern is whether the Federal Reserve tightens monetary policy too quickly and by too much by raising interest rates.
How should one respond?
In the short term, markets rise and fall. In the long term markets have always risen. However, they do not rise in a linear manner and at times, one could be left reflecting on one’s decision to invest when markets are unsupportive.
In the short term, markets react and overreact to sentiment, both positive and negative. In the long term what drives market returns is the earnings from the underlying companies that one is exposed to, not the short-term sentiment in the media or daily markets.
For the disciplined investor however, this is indeed the time to hold one’s nerve. One must continue to tune-out the daily noise and look at the underlying fundamentals of our own investments. Quality will out.
As Warren Buffett observed, ‘The stock market is a device for transferring money from the impatient to the patient.’ Indeed, it is.
Within the last 20 years, a 20-year investment into FTSE All Share Index (the UK market average return) since the start of 1997 was 268% over the 5,216 trading days. If one were to miss the best 30 days during those 5216 trading days, the return to the investor would have been -8%. (Source Tavistock Wealth)
It is difficult to remember that the market is capable of helping us maintain and sustain our wealth over the long term, when we witness the challenges across the world that we see today.
In our experience it is impossible to predict the best time to invest or sell and one must remain invested in order to benefit from the rare but important positive days.
Often during market turmoil, we could possibly believe that the end is nigh! These emotions are not helpful in making logical investment decisions. There have and always will be significant uncertainties in the world – Russia, the Middle East, the EU, Africa, US domestic and international policy as well as our own political and economic agenda in the UK are always present. Can you remember a time when things were certain?
Paul Harvey the American radio broadcaster summed it up well ‘In times like these, it’s helpful to remember that there have always been times like these.’
Conclusion
The key with stock market volatility is not to over-react. Share prices will fall and rise and it’s important not to be ‘out of the market’ at the wrong time as this can be costly to your overall capital values.
We believe investors should remain focused on the medium to long term, investing over ‘time’, rather than trying to ‘time the market’. Ongoing management of one’s financial plan and investments remains important and generally volatility can be partially mitigated by diversifying investments suitably across a broad range of asset classes that include equities, commercial property funds, fixed interest securities (bonds) and cash.
If you are unsure, you should obtain Independent Financial Advice.
May we wish all readers a Happy Christmas and a peaceful and united 2019.
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 [email protected]
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