Good afternoon to you all, I hope this week’s News, Views and Truths finds you all well.
It’s a bit stormy. Weather wise and market wise. So let’s get into it.
As regular readers will be aware of, there are a number of headwinds that are challenging the unopposed gains investors have seen in global stock markets over recent years. Be these trade wars, bond market jitters or a whole host of other, perfectly natural occurrences. Wednesday saw the beginning of a global stock market sell-off, with the FTSE 100 falling 3.7%, the US S&P 500 falling 6% and the Japanese Nikkei 225 closing this morning, down 4.57% over the week.
What really got people talking is that bond markets fell as well. Bonds are held within diversified investment portfolios to act as a non-correlating asset to equities; as equities fall, bonds, hopefully, will rise and therefore offset the losses. This week we have seen the reverse of that.
The question is “Why the fall?” As you can expect, there are many potential reasons.
The main reason is that the US Federal Reserve Bank has announced that they are planning to raise interest rates at a greater pace than the market anticipated. Although this is somewhat understandable due to the robustness of the US economy, the knock-on effect – higher borrowing costs for US consumers and businesses – could lead to an economic slowdown.
You can assume that President Trump has something to say about this; how about, “The Fed is crazy.” He is of the opinion that interest rates should be reigned back in and that the bank’s decision has resulted in a market correction. And the market is agreeing. Tech and luxury brands have taken the hardest hit, with highly valued names such as Apple and Facebook suffering most.
So what about bonds? It is no doubt rare to see both stocks and bonds falling at the same time; it’s what made the 2008 global credit crisis the event that it was. Bond yields rising is usually a sign that the economy is growing strongly, that investors are putting their money into stocks instead and that interest rates are set to rise in response to higher inflation.
However, this increase in yields is more reflective of the fact that the US budget deficit is starting to increase, in part due to Mr Trump’s tax cuts and so US investors may be demanding more of a premium to hold US Treasuries. To put this in perspective, yields on 10-year US Treasuries have surged from 2.853% at the end of August to as high as 3.261% earlier this week. German 10-year bonds yield 0.54%; UK 10-year Gilts yield 1.68%.
Now, time for some perspective. Via a cartoon.
This is not flippant. Far from it. Albeit a sensationalised caricature, it does highlight the issues of the market, the emotional responses significant short-term moves elicit and the danger of heeding those. The prominent US investor, Nick Murray, sums it up best:
“All equity market declines are temporary and eventually give way to the resumption of the permanent advance. Permanent loss in a well-diversified portfolio is always a human achievement of which the market itself is incapable.”
Permanent loss of wealth is attributable to investors allowing their heart to rule their head, giving into emotional responses and selling out at the wrong time. This is one of those times; albeit an almost insignificant one. But as the media takes hold of this bad news, clamouring to write headlines that include the phrase “billions wiped off”, remember, you have Three Counties to rely on. If you have any questions or concerns, you can always speak to us.
And we have seen a bounce back today. The FTSE 100 is currently up 0.76%, the Nikkei closed up 0.46% on the day and the futures market is pointing to a positive open for the US markets. Because that is how the markets work. That is how you generate longer term returns.
And to conclude, a playlist. Storm Callum is hitting the UK this weekend so batten down those hatches and stay safe. I shall see you all, in one-piece, next week.