Following recent volatility in global stock markets we wanted to provide you with an update from James Kempster who manages our IMS, AMP and Discovery investment solutions.
At the start of August many markets experienced large falls including the Nikkei in Japan which suffered its worst day since 1987, falling 12.4%. Many indices elsewhere in Asia as well as in Europe and the US were also down by over 2%. The situation was made more complicated both by the fact that August sees many traders head off on holiday which means a small amount of activity can be more impactful, combined with the ongoing trend away from active investing versus those using automated trading systems.
In addition, the Magnificent Seven stocks, the engine of global growth for the last 18 months, have lost a combined 15%, or $2.3trn, of their market cap since peaking in July. However, they’re still collectively valued at $14.7trn. As of the 6th of August, only Apple has managed to keep its market cap above $3tn – Microsoft and Nvidia have both fallen below this level.
In a recent internal presentation, I noted that the chance of a US recession was thought to be around 50% at the start of the year, but until the drama of the last week you’d have been hard pressed to see any mention of the possibility. All that changed with the release of weaker than expected jobs data which gave rise to concerns that the American economy is slowing down faster than the Federal Reserve (Fed) had expected.
This has made it almost certain that the Fed will cut interest rates when it meets in September. This was already widely expected, but rising recession fears have led some forecasters to predict that they may have to implement a cut of 0.5%, rather than the usual 0.25%. There is also speculation that it may cut rates by as much as 1.25% by the end of the year to stave off a crunch. That’s around six times as much as had been forecast at the midpoint of the year.
It should be noted that there are many economists who were surprised by the scale of the reaction. US economic data have worsened, but that was always going to be the case given how strong they have been. The point of raising interest rates is to cool an economy down – the trick is ensuring that you don’t let things go too far. The challenge for the Fed is to focus on economic realities and to avoid getting caught up in the emotions that surround events like this.
As ever when faced with volatile markets, remaining stoic is also the best course of action for investors with appropriate investment horizons. The day after the worst day for the Japanese stock market in almost four decades, it rose by 8%. Markets in the US also rallied as investors took stock of recent events and unwound some of the indiscriminate selling that had occurred. This is a rapidly evolving situation, and it would be unwise and unhelpful to attempt a prediction about what direction markets will take next.
Regular readers of my updates will know that I have been growing more concerned about the concentration of US stocks. I note in the upcoming investment review that markets had already begun to realign away from the Magnificent Seven as rising chances of a US interest rate cut had boosted the potential for other, often overlooked stocks. Many of our best performing funds over the last quarter were those focused on smaller companies or so-called value stocks - those with share prices that don’t reflect their inherent value.
My updates also regularly focus on the importance of diversification, and it is precisely because of situations like this. Across all of our models we hold a range of funds, including equities and bonds, as well as cash and others designed to be uncorrelated with markets. Volatility is not something that can ever be completely avoided and is part and parcel of investing. We do not try to time markets and the latest bout of turbulence doesn’t change the recommendations in our latest investment review (most of which were already agreed in July).
So, what should you do? The best answer is almost always to stick with your long-term financial plan and stay the course. If your circumstances have changed or if you want more information, please speak to your financial planner.
The above article is intended for information purposes only and should not be taken as advice.
The value of investment units can fall as well as rise, and you may not get back all of your original investment.
