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Calm before the next stock market storm?
It’s been nearly a month since the global stock market sell-off and equities still haven’t fully recovered all the lost ground. While some institutional investors say the sell-off wasn’t severe enough for them to go bargain hunting, others suggest another (deeper) correction could be on its way later this year.
The truth is that no one really knows what will happen to the market. However, it is always worth listening to different viewpoints to comprehend what’s going on.
The FTSE 100 is currently sitting 2.8% below the level at which it traded on the night before the first major movement happened, being the US stock market sell-off on 2 February.
Most other major indices around the world are also sitting in negative territory in the period since market close on 1 February, although the NASDAQ 100 is slightly higher and so are the major indices in Russia and Brazil.
WHEN IS ROUND TWO?
Investment bank Morgan Stanley believes the global markets sell-off was just an ‘appetiser’ before the main course. It believes gains for risk assets – such as equities – this year will be front-loaded in the January-April period.
‘Things get trickier after the first quarter,’ it writes. ‘Past March, markets will need to digest rising G3 core inflation and declining PMIs, economic surprises and (quite possibly) earnings revisions.’
The bank believes we’re in the late stages of a late-cycle environment. It implies ‘rising equities, rising inflation, tightening policy, higher commodity prices and higher volatility’ are a fairly normal patterns before the stock market trips up.
Michel Perera, chief investment officer at Canaccord Genuity Wealth Management, believes we are still in a bull market as the fundamentals remain strong.
However, he too reckons we could get another correction later this year. ‘Inflation is one of the big issues. Markets will follow every data point on inflation like a hawk,’ he remarks.
HOW DOES THE SELL-OFF COMPARE HISTORICALLY?
Perera says the average correction in a boom market from peak to trough is 14%. We saw approximately 10% reduction over two weeks earlier this year.
The historical average of the Vix index – which measures the market’s expectation of 30-day volatility on the S&P index in the US – is 15. At the time of writing it was trading at 16.40, significantly below the 50 level it reached last month.
The current level of the Vix implies that investors aren’t panicking which is a good sign. The Vix is good proxy for all developed markets, even though it is based on US equities.
Now is a good time to prioritise a review of your portfolio in order to manage the potential downside. Reappraise every investment, asking whether it is still appropriate to own when considering your risk appetite and time horizon.
But don’t let the recent market pullback put you off making new investments completely. We’re in the middle of corporate results season which is effectively a health check on many listed stocks.
There are plenty of opportunities to buy decent companies on reduced share prices as a result of the market sell-off.
If you believe they have the right credentials to thrive longer-term, now could be as good a time as any to buy the shares assuming the valuation isn’t excessive. There may be bumps along the way, but that’s the price you pay for putting your money to work in the markets. (DC)