As at market close on 8 February, the US share market has retreated by 10% from its recent record highs. Most of the falls have occurred in two particularly bad days over the past week and it didn’t take long for the standard “bloodbath” headlines to start appearing across news reports. Most global markets have retreated in sympathy (as often is the case) and this includes the Australian ASX. As I write, the All Ordinaries Index is down approximately 5.7% over the same time period.
We expect the media will continue to take full advantage of this volatility by inflating and amplifying the potential causes and direction of markets from here. Volatility and market corrections are not a new phenomenon though, so we aim to provide some perspective below.
The 2017 calendar year was a very strong year for share investors, and the US market in particular continued to lead the charge with the broad-based index of US stocks (S&P 500) up 19.4% for the year. It was a very unusual year as volatility was very low by historical measures and when volatility is this low, markets can tend to overshoot fundamental valuations. After a very good start to 2018 the recent fall is not unexpected, nor the increase in day to day market volatility. Corrections such as this are impossible to predict timing wise though, which is why keeping a level head and maintaining a sound overall investment strategy is key!
Share markets will settle down again, whether that be in a week, a month or three months, who really knows? What is known is that there has been no fundamental change in the underlying businesses that represent the shares investors and superannuation funds own. In fact, the recent volatility was sparked by better than expected news on the economic front and the fact that wages are starting to grow more than expected in the US. Not too long ago the bad news story was the potential for deflation, not inflation! The legitimate concern is that this will trigger interest rate rises that will start to slow the growth rate of the economy and business profitability in due course. Share and bond valuation models are therefore adjusted and this will naturally take a bit of time for the markets to fully digest but we would rather see a healthy global economy with jobs being created then a stalling engine of growth (the US economy created 200,000 jobs in January; 20,000 more than expected)!
In the big scheme of things though (for long-term strategic investors), it doesn’t really matter! In fact, market corrections often lead to opportunities and the research we have points to this being a natural correction, not a structural decline. Market pricing of return seeking assets such as shares and property will always be volatile (much more so then the underlying earnings these assets generate on a regular basis) but as long as your overall investment strategy and mindset is sound, there is no need for alarm.
Peak Wealth Design Asset Allocation and Strategic Advice
We use a strategic, long-term approach with the construction of our portfolios with the aim to match overall asset allocations to your goals, objectives and risk tolerance. Diversification of both asset classes (eg. shares, property, bonds, cash, term deposits, alternatives) and investment styles aim to provide robust, consistent results across the market cycle. Strategic use of cash and income distributions is also an important ingredient in risk management. For some, this may result in having strategic low risk cash reserves to continue to fund ongoing retirement income needs in down markets (having no need to sell growth assets when prices are low) whilst for others it may result in topping up on growth assets such as shares when opportunities arise and prices look low.
We cannot fully insulate our clients from market volatility but nor would we want to. It is this very exposure to volatile, high quality assets that creates the expected returns over time. We can control the overall expected volatility of our tailored portfolios though, and match these to the risk profiles of our clients.
Overall we remain very comfortable with the asset allocation and specific investment managers that we are currently using. We review the asset allocation of your portfolio and investments as part of our ongoing review service to help you remain on track in reaching your goals and objectives.
In the interim, if you have any concerns at all please do not hesitate to contact us at The Peak Partnership Wealth Design Solutions.