Dolfinwise Market Update February 2018
The year has started with volatility in the financial markets like we haven’t seen for many years. On Monday night, the US market suffered the biggest percentage drop since August 2011, reversing the strong gains experienced during the month of January. Whilst the “noise” in the media in relation to the recent market gyrations may be disconcerting to investors, it’s important to take into context the real magnitude of the correction. As illustrated in the chart below, the US stock market has gained around 300% following the bottom of the GFC with virtually uninterrupted growth experienced during 2017. The recent sell-off only reversed the gains experienced in January 2018. The US market closed higher last night, ending the trading session around 2.33% higher.
The sell-off in stocks over recent days appears to have lacked a specific trigger, and was most likely a negative reaction to positive economic news. The speed at which stocks were being sold on Monday night suggests that the sell-off may in part have been triggered by algorithms and high-frequency automated trading as opposed to deliberate trading decisions by human beings. This is related to companies being revalued by computer models due to expectations of higher interest rates being factored in.
Combatting inflationary pressures will be the great balancing act for the US Federal Reserve this year. It’s important they don’t raise rates too slowly as that could lead to rapid inflation, however raising interest rates too fast could trigger a recession. As a result we expect they will be cautious. Although interest rates in the US are improving, for investors, the interest rates offered by banks are still extremely modest at around 0.50% p.a. In a rising interest rate environment Bonds are also an extremely risky asset class therefore equities are likely to remain the best option for investors that require income producing assets despite the potential risk of gradual asset revaluation we have just seen the start of as interest rates rise.
After the remarkable returns experienced during recent years we expect that market volatility is likely to increase in 2018. Whilst we do not expect that the returns experienced during 2017 are likely to be replicated in 2018, we believe there is still reasonable potential for modest growth in equity markets over the next 12 months. We also expect that interest rates in Australia are unlikely to increase this year therefore, on balance; we believe that investors are likely to be adequately compensated for continuing to hold shares. In the longer term history tells us that shares outperform all other asset classes and patience in time of volatility is always rewarded.
We want to reassure our clients that, at this time, we are not advocating any changes to our current investment approach. If you are feeling particularly concerned about current market volatility or your portfolio, please don’t hesitate to contact us so we can discuss your specific circumstances and options.