Current stock market declines made mainstream news bulletins last night – and any time finance becomes what I call a ‘News at Ten’ issue is worthy of attention.
Plenty of numbers are being thrown around but in essence, markets in Europe have mirrored heavy drops in the US and Asia, with the Dow Jones suffering its worst ever one-day fall on Monday. The fact this commanded News at Ten time indicates how complacent markets had become: equities had enjoyed their best start to a year since 1987, buoyed by President Trump’s tax cuts, and the last 12 months has seen a series of all-time highs in indices around the globe.
For several months, markets have exceeded previous highs, so it’s not a surprise to see the kind of 5% to 10% correction that has traditionally been a function of healthy markets. Now we finally look to be in the midst of such a pullback, we echo our long-held view: this has long been expected, is unlikely to mark the start of a recession and should present opportunities for patient investors.
While fear of missing out has been a driver of market exuberance, this looks to have given way – at least for now – to fear of inflation. Our view remains that the three Cs are key to short-term market sentiment, China, commodities and central banks. While rising oil prices and hard landing concerns around China have failed to spook markets, fears that rising inflation may force policymakers into hiking rates quicker than predicted seems to have triggered the recent panic.
As ever, we can only wait to see how far markets ultimately fall but having been expecting a correction for so long, we are relieved to get it over and done with and focus on more fundamental factors. One thing to monitor is whether this pullback is enough to shock markets out of the low-volatility environment that has prevailed in recent years – the current spike is no surprise, but we have seen similar moves before only for volatility to dissipate.
As ever, we would stress that we have seen many of these market pullbacks before and the vital lesson has always been to maintain investment discipline.