Global markets have been unsettled in recent weeks. Since the start of October, developed stock markets have fallen by 6.6% and emerging markets have lost 8.9% in just 9 trading days. Global bonds have also been suffering, with UK gilts down around 3% since early September. Here’s what we think is behind this volatility, and why we think it’s important to remain focused on your long-term investing goals.
So what’s going on?
The US economy has been running hot this year, with extra impetus from tax cuts. Many investors expected a slowdown over the summer, but this failed to materialise. In fact, growth appeared to accelerate in September. This has led investors to reassess how far interest rates will go up in the US in 2019, especially as the markets were more optimistic than official projections from the Federal Reserve. As a result, the cost of borrowing – known as bond yields – has been rising through September and into October. US bond yields have now risen above key levels (3%/3.25% for 10 and 30-year), out of ranges that have persisted for several years.
This has worried investors in ‘growth’ stocks, like tech companies, which don’t pay a dividend, and valuations are more sensitive to a higher discount (interest) rate. The alleged hack of US tech industry supplier Super Micro Computer Inc. hasn’t helped sentiment either.
Should you be concerned?
First off, the 3.3% decline in the S&P 500 on Wednesday was a big daily decline, but it doesn’t mean that the outlook for US equities is poor. In fact, looking back at periods when we have seen sharp daily declines, the performance over the next year tends to be positive. Since 2010, after daily losses of 3% or more in the S&P 500, the market has seen an average return of 7.1% over the next three months and 13.5% after six months, based on 16 occurrences.
Secondly, the 7% fall in global stock markets this month is certainly a bit of a jolt but such a ‘correction’ is a very normal event in any one year. As you can see in the chart below, every year since the financial crisis US stocks have produced a positive return, but still within those years there have been large declines – 2017 was the exception.
Finally, the outlook for stocks is still encouraging: equity market ‘indigestion’ over a jump in bond yields is quite normal, but doesn’t tend to persist, and the level of yields is some way below levels that have caused stocks to de-rate in the past. Meanwhile, global developed and emerging market equity markets look somewhat cheap versus the long-term history (25+ years), and earnings growth remains strong.
How should we react to this market volatility?
Given it’s quite possible that stock markets fall further in the short term, should we attempt to try and time the market?
Timing the entry back into markets is very difficult and often ends in greater losses than if you had stayed invested through the volatility.
The key to long-term investing success is to remain focused on your long-term goals and try to stay calm during the regular, but temporary, periods of volatility in stock markets.
We’ll continue to examine the market data as it comes in, ensuring your portfolios are positioned to ride out the volatility, and we’ll keep you updated with blogs like this one.
Sources in commentary: Bloomberg
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance.