Equity market volatility - an update
I thought I would write to update you with my view on the current stock market volatility and why I think this is happening.
So, what has been happening in equity markets?
Global equity market volatility has increased in recent weeks, with the US market particularly affected. The S&P 500 for example is down 9.2% from the all-time high it reached earlier this month.
Several factors have pulled stocks lower of late:
The first is the stage of the economic cycle. Although the phase the global economy is currently in has historically been reasonable for stocks, returns have been lower on average and corrections more frequent.
The second factor is monetary policy. Most central banks have rapidly pivoted to stressing inflation risks. As such, they are steering markets to expect a faster tightening in monetary conditions. For example, raising interest rates.
Finally, perceived geopolitical risks have risen, with tensions between Russia and the West running high over Ukraine.
While it’s never fun going through any equity market correction, it’s important to remember that 10-20% equity market corrections are fairly common, with pullbacks in excess of 10% (defined as a correction) in 12 of the last 22 years (S&P 500).
Of the 12, there were 7 corrections in excess of 15%, 3 in excess of 25% and one in excess of 47% - yet the market climbed over 515% during this period.
The key to surviving any of these corrections has been a balanced portfolio (across asset classes and geographies) and a focus on quality companies with organic growth / strong balance sheets / low net debt - and that’s exactly the type of portfolio that I recommend.
Equity corrections are always painful to go through, but they are part of a healthy market cycle. The key to longer term returns is to avoid panic selling at the bottom.
I don’t have a crystal ball
And of course cannot predict what will happen in the future, but those clients who have known me for a while and who’ve been invested through market corrections in 2020, 2018, 2015/16, 2011 and 2008/09 will know that I’m reminded of the old saying that it is 'time in the market rather than market timing’ that is important.
I’ve been in contact with several of the active fund managers I tend to recommend and they are reporting that from a bottom up perspective they see more opportunities now than they have seen for some time.
In other words they are buying shares in good quality companies whose shares have fallen in value.
I can’t I’m afraid give you an idea as to when the current volatility will end and there are still plenty of potential bumps in the road in the next couple of weeks, for example the tensions in Ukraine could deteriorate further.
I suspect that 2022 will be bumpier than recently for portfolios but the odds still seem reasonably good for positive returns over the medium term.
If you have any questions or queries about your Investments in particular then please remember that you can contact me at any time either via email or phone.