After such a sustained period of markets setting record highs, investors could perhaps be forgiven for forgetting that volatility is an inherent feature of stock markets.
Until the events of the last week or so, the new year had carried on where 2017 left off. The S&P 500 was up 5.6% in January. At the time of writing, the correction leaves the index down by less than 1% for the year to date.
The most important thing for investors to acknowledge is that markets have been on an extraordinary run. Next month would see the bull market enter its tenth year. Another five months after that and the S&P 500 would have equalled the longest bull run in its history. Since March 2009, the FTSE 100 has risen 187%, while the S&P 500 has surged some 284% in sterling terms.
This strong run has been coupled with a period of record low volatility for global equities – a 60-year low indeed – so there was always an expectation that volatility would return.
The correction we’ve seen underpins the fact that the stock market and the economy are two very different things and do not always move in the same direction. Ironically, the falls in global equity prices in the past few days have come on the back of strong economic news, particularly from the US, rather than any concern that global growth is faltering. Indeed, global growth is anticipated to be strong this year.
The fundamentals of the global economy remain healthy and it is worth remembering that bear markets have typically occurred just before the onset of recession.
Nevertheless, investors will need to adjust to the fact that the era of loose monetary policy, which has helped propel markets, is coming to an end. Against that backdrop, it is reasonable to anticipate more volatility in 2018 and beyond.
In this environment, the ability of active managers to identify and invest in companies with strong fundamentals will come to the fore. Companies whose fortunes have been propped up by ultra-low interest rates and cheap money are likely to suffer.
Whatever the next few days and weeks holds, it is important that investors remember the benefits of holding a diversified portfolio, maintain their long-term focus and avoid any temptation to head for the exit.
For active, long-term investors who hold their nerve, such periods present opportunities.
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