Whitechurch Asset Views - February 2018
Some investors may be shocked that stockmarkets can go down considering the extended bull run we have seen in financial markets over the last couple of years. However, given that, as we write, major benchmark market indices are generally showing a decline of around 5% (in local currency terms) for the month; in context, this is quite a small movement (so far) compared to previous market sell-offs.
What has caused the sudden change in investor sentiment? Risk aversion has been driven by the US. Strong economic and market growth, further buoyed by the recent tax reform bill, has caused investors to focus on inflation and the future path of US interest rates. Initially, the panic that ensued was confined to a sell-off in Government bond markets at the end of January. However, this has now fed through to equities in February.
It remains to be seen whether we will see sustained market volatility. In August 2015 and January 2016, we witnessed far steeper daily declines only for stockmarkets to regain their poise and forge ahead within a month. Whether the current investor nervousness abates as quickly remains to be seen but we would urge investors not to panic.
As we move through February, it seems that the recent declines are global stockmarkets taking a bit of a breather, with investors being spooked by inflationary concerns. Although no-one likes to see their portfolio values fall, in the short-term a reality check that markets do not go up in a straight line may prove timely. Stopping irrational exuberance and markets being driven by the FOMO (Fear-Of-Missing-Out) brigade taking on too much risk and ignoring fundamentals and valuations is welcome in our eyes.