- Investment Insight
- 4 minute read
Given recent market volatility we believe this is a period of volatility and not the onset of something more deleterious.
- Late cycle investing (what we are in now) comes with more volatility and so rapid sell-offs followed by rebounds is a feature of investing in the latter stages of an expansion
- We had one correction already this year (markets were down sharply in the 2nd quarter) and rebounded nicely throughout most of the 3rd quarter up to last week
- The catalyst for the sell-off was the sharp rise in bond yields, the US 10 year moving from 3% to 3.2% and bond yields elsewhere also moving higher
- The move was sparked by stronger US employment data, reminding investors that in tighter labour markets such as we have in the US and UK, wage gains can cause inflation to move higher
- The downdraft has been exacerbated by ongoing political concerns: trade friction, Brexit, Emerging Markets, the Italian budget. But the speed of the decline is also a function of ‘algorithmic traders’ whose computer driven selling programmes cause market moves to be more exaggerated
- A rise in rates does have an impact on the valuation of shares; it causes price to earnings multiples to contract, which is what has happened.
- The adjustment is sometimes smooth and sometimes violent
- Given markets and stocks had been fairly strong in the 3rd quarter, sentiment was complacent and hence we got the violent reaction this time
- Declines of this type can continue for weeks before markets stabilise
- October is also traditionally a poor/corrective month for returns so monthly seasonality is likely a factor as well
- It remains our view that economic growth and earnings growth, particularly in the US, remain supportive
- The start of earnings season is next week and we think this will help stabilise markets, particularly for companies able to beat consensus estimates
- We still think that equities are the best place to be to deliver growth and ultimately will give a better return than cash or bonds
- Stock selection is critical and we are closely monitoring market movements for opportunities to buy into favoured names at more attractive prices
- We are also looking at sectors of the market which may be more defensive as a way to cushion further volatility
- While most things have been down over the last week, the declines in bonds and alternatives in general have been less
- Multi-asset class investing and thus diversification is helping to cushion the experience of volatility in client portfolios
Taking the above points into account we are staying the course and will be reviewing stock and sector exposure in the coming weeks.