Nobody likes volatility. It can scare the heck out of the best of us, and certainly can prompt any of us to be concerned about our investments. We’ve heard it before, and it bears repeating today.
We wanted to lend some much-needed perspective on the last several days of share market losses.
Share investments at time of writing are off circa 8% since last month’s record high. (Note that none of Sterling Planners diversified portfolios have 100% in shares) Whether portfolios remain in positive territory at years end is anyone’s guess, however we believe the share market volatility remains more the product of fear than substance.
The markets are not in need of a massive correction and there is certainly nothing to suggest right now that we have any imminent recessions around the globe.
The reason for the drop is a combination of news reports citing US Fed increases in interest rates, trade war worries and the civil unrest which grips the US right now. They all contribute to a general sense of unease, and that can easily translate – as we believe it has now – into some emotional sell-offs in stocks. These US centric issues have a ripple effect around the globe and all markets follow suit.
Here’s how we see things now –
Bond yields (interest rates) are still unusually low. The Central banks are not even close to choking off the recovery.
Real borrowing costs (interest rate less the rate of inflation) are still almost zero in the developed economies.
Interest rate increases are a sign of a healthy economy. They communicate both the Central Banks confidence they can get back to more normal levels without hurting the economy and bond sellers’ need to raise rates to attract people to buy bonds instead of moving into stocks.
Corporate profits are still very strong – likely to grow 20% this year and another 10% next year – that’s why the herd has been moving into shares.
Job growth is still high and wage growth has not yet risen to the level which would even suggest that employment is peaking.
Threats of trade wars are serious stuff and we won’t sugar coat that, but threats are different than the actual occurrence of a trade war. The tariffs are at this point a headwind, not a game changer for the global economy. They have more the feel of negotiating tactics than long-term strategy or policy. They can also be withdrawn just as quickly as they are imposed, so there is a self-corrective component to the authority which has been granted to the US President.
On that front, we must also factor in the positive trade steps taken for example the US, Mexico and Canada. Both were threatened with high tariffs, markets reacted negatively, and ultimately trade agreements were signed; and the market recovered easily.
We feel that China will take longer, but that the ultimate outcome will be the same: lots of sabre rattling and posturing (certainly in public) with more realistic negotiations and results behind the scenes.
The fact remains China has taken advantage of the other economies for several years. That needs to change, and we believe it will if a US trade war is actually started with China, there will be dislocations (and we are not fans of trade wars; they do not help either country), but they will not hurt the US as much as some pundits are predicting. We believe the downside would not be a major recession, but instead a decrease in the global economy’s growth rate.
Right now, we believe this is just another panic attack. We’ve seen lots of these, and the market always recovers. We seem to forget the previous ones the minute the new panic grips the front page.
We hope this helps lend some perspective. In the meantime, we will watch the trade negotiations closely in case anything substantial changes there.