Tune out to the noise
Market downturns are normal, but it’s also common for a recovery to soon follow, which is why investors should remain cool-headed when volatility hits.
The recent correction in global stock markets may have looked like a wild card, but only because it came as such a shock to investors after the exceptionally long period of low volatility that preceded it. Last year was the calmest year on markets in more than half a century.1
The fall triggered the usual sensationalist headlines about the tens of billions of pounds wiped off the value of pensions and investments. Equally predictably, the headlines failed to follow the story through to report how much was regained in the subsequent recovery.
It was certainly a sharp shock. Over nine trading days from late January, the benchmark S&P 500 index in the US suffered its swiftest ever correction when starting from an all-time high. (A correction is defined as a fall of more than 10%.) Yet by the end of last week, the S&P 500 had regained nearly 60% of its losses from the peak set on 26 January and is now only 3% below its record.
The danger of paying too much attention to such short-term noise is that it increases the likelihood of reacting to it. And many investors drawn into the momentum-driven markets of recent years did just that. In the first week of February, the world’s biggest exchange-traded fund, a passive investment fund that tracks the S&P 500 index, suffered outflows more than twice as large as any in its history. 2
The return of volatility was sparked by fears about rising inflation, but it also indicates a market ready to face up to reality. A return of inflation would show that the global economy is at last back to something like normal. Central banks, after years of easing, are finally cutting back on their post-crisis policies in favour of quantitative tightening; which ultimately means less money flowing into markets.
Since early February’s spike, stock market volatility has dropped close to its long-term average. There is every chance that volatility is here to stay, as the market remains likely to alter its opinion wildly on the significance of these and other macroeconomic developments over the coming months.
A quick look at stock market history shows the value of staying invested, rather than running for cover at the first whiff of volatility.
Data for the FTSE All-Share Index shows that short-term falls during any given year are normal and can be precipitous. Despite average intra-year drops of over 15%, however, the market recovered to register positive returns in 23 out of 32 calendar years.
In 2003, for example, the UK market fell 17% at one point, yet still gained 17% over the calendar year.
The message that investors need to keep in mind is that market downturns are normal and not a reason to panic.
Source: J.P. Morgan Asset Management, The Guide to the Markets, January 2018
When the market suddenly falls, it is understandable that some investors take fright. Yet the recent turbulence serves as another reminder that in times of uncertainty, the safest option can simply be to tune out to the noise and keep focused on your long-term objectives.
Past performance is not indicative of future performance and the value of your investment, as well as any income, can go down as well as up. You may get back less than you invested.
Source: FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.
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¹ Source: Bloomberg, 28 February 2018
2 www.seekingalpha.com, 21 February 2018