Where markets are concerned it is often difficult to discern the data from the narrative especially when the narrative is a bombardment of negative news regarding Brexit, trade wars, protests in France etc. Trying to see through the “noise” at a time like this can be extremely difficult.
The Market and the Economy are linked
Although investor sentiment has an influence over the short-term direction of the markets, in the longer term the stock market is very much linked to the economy. We believe that the sell-off in the markets over the last two months has been driven by investors’ emotions rather than a response to deteriorating economic data.
10% sell-offs are not unusual
Yes, there has been a sell-off but this has been nothing out of the ordinary. The markets have experienced a significant correction but to put this in perspective, a 10% correction in any one year is not unusual. Most years experience a draw-down of at least this magnitude. For example, see the chart below of the UK FTSE 100. In the nine years since the start of 2010 (i.e. the bull market) there has been ten corrections of 10% or more. Click charts to enlarge them.
Likewise, in the U.S. (see chart below) you can see that corrections of at least 10% are quite a normal occurrence. Sometimes two in quick succession as happened 2015/16 and again this year.
It’s all about the economy
History tells us that Markets rarely fall by more than 20% (i.e. a bear market) unless the economy is in recession, or a recession is imminent. Even a large correction, i.e. more than 10%, is very rare when the economy is growing. Therefore, investors watch carefully for signs that an economy is slowing. Right now, the risk of an imminent recession seems low, certainly in the U.S, and leading economic indicators are not yet turning down.. Even so, much has been written recently about global growth concerns – we link two articles below (from influential sources) that claim these fears are overdone:
Fears over a growth slowdown have gone too far – Goldman Sachs
Investor fears about recession seem overdone – IMF’s Christine Lagarde
Obviously, we will continue to monitor the markets closely and we will take action as we see fit but in keeping with many commentators we think the recent sell-off seems over-done.
We hope you have found this latest update of interest. Thank you for reading.
Disclaimer: ‘Where the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. The information contained within this communication is believed to be reliable but Realm Investment Management Limited does not warrant its completeness or accuracy.
This communication is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell investments.’