The current market sell-off is a cumulation of world events. But this is not necessarily something to be concerned about for the long-term investor because ‘timing’ the market for entry and exit has proven largely futile, short-term blips are largely irrelevant in the grand-scheme of compounded interest and regular injections of capital.
A healthily diversified portfolio helps to iron out underperforming asset classes and markets in the short run and provides measured smooth growth over the long haul. For any investor on a ten-year upwards timescale, the current market fluctuations are not worth the stress of fussing over.
Having said this, the causes shall be addressed and where we see markets heading (Hint: Asia, UK, gold, corporate bonds over US equities on valuations to assets, expected growth and long term, cyclically adjusted averages).
What’s the fuss about?
When America starts to dip, investors buckle up and start to take notice. We are well seasoned into this bull run, having the last flutter in February of this year, leading investors to question: ‘is this the end?’
Outside of the US, certain regions, notably Japanese markets have been in retreat for months.
Trump’s poorly timed tax cuts bolstered the US economy with a hit of caffeine, with its effects now wearing off when the Central Bank starts to put the dampeners on the US economy with dialling back of easy money under Quantitative Easing and Trump’s accusations the ‘Fed has gone crazy’ with rate hikes. These shifts aren’t stirring great confidence that growth is here to stay, especially when trade wars and isolationism are dividing global cooperation and trade, starting to feed into higher costs for cash-strapped US consumers.
Closer to home, a disorderly Brexit adversely harms market sentiment. As negotiations come to a climax, everything is being kept under wraps, leading to unpredictability for businesses, consumers and investors apiece.
Predictability is a key requirement for businesses to be sure their investments have a solid chance of paying off. A Britain potentially both in and out of the common market forces preparations for both eventual outcomes.
When it is unknown whether the EU will have the same liquidity or free movement of capital come 2019 as the UK leaves and Hungary and Sweden are poised to leave the common market, businesses delay their purchases, deals and replenishing their inventories.
Meanwhile the UK possibility of Chequers being rejected in the Commons or the EU giving a No Deal Brexit or a leadership challenge before Christmas does little to settle nerves. Much now depends on how negotiations are perceived to be going.
Some investors are taking stock, consolidating the gains made in 2018 to date as the effects of trade wars, rising interest rates and poorly timed tax cuts are coming home to roost.
Headwinds of a Chinese slowdown, and tightened border controls on luxury goods from abroad with Chinese market representing a third of the global luxury market as phase 2 of China’s efforts to repatriate consumer spending of its citizens, slowing global growth. Chinese devaluation of their currency, and the strength of the US dollar from strong economic performance with the ‘Trump dividend’ has led to emerging markets’ capital flight to America. The Fed rates are a reactionary measure to cool the inflation. Since the debts of emerging economies are largely in dollars, this equates to a spike in their debts and a risk of contagion in capital flight abroad to ‘safer havens’ – ie. American asset classes.
What investors should take from this
What patient investors should concern themselves with is the long-term performance’s ability to smooth out returns within diversified portfolios to capture the better performing market trends over those periods relative to the market benchmarks.
Watching each and every peak and trough during market disarray with sensationalist vigour of Sky News or Investment Daily is not the answer unless you are momentum trading, stockbroking or actively trying to time the market for the next 15% drop in Tesla to purchase more shares.
There may be such thing as a straw that breaks the camel’s back, but the correction in markets will be caused by many factors when it does eventually come. This is not to say there is not opportunities out there, as certain world markets look decidedly undervalued, especially Asian opportunities, specific emerging markets and the UK economy, despite the global put. In other words, the places everybody else is cowering away from.
It remains consistent that US equities remain significantly overvalued above long-term averages, with valuations being allowed to sail past reason, e.g. FAANG stocks and the tech sector generally.
The Fed is finally addressing the base rate zero lower bound concerns surrounding a liquidity trap with their rate hikes. In spite of Trump’s huffing and puffing postulations about a Fed ‘gone loco’, the rate rises have long since been overdue, and a return to interest rate normalisation would hopefully put a cap on inflationary spirals and better prepare for the next market crash.
While the trade war, tax cuts and rate increases in an overheated economy have been precursors for the market retreat, Trump may well be spot on about craziness, but perhaps not at which door he lays the blame.