Stock market volatility: perspective is key
First published on February 9, 2018
Staying focused on your individual plan and investment strategy will be key for investors following the recent increase in volatility and declines in equity market prices. There may be further volatility and media coverage in the days and weeks ahead and we hope this information will help provide context to recent market movements.
Why did this happen?
Increased volatility has largely been driven by a sharp re-pricing in US bond yields which was a response to higher than expected wage inflation in the US.
Markets quickly became concerned that they may have under-priced the chance of rising inflation, and ultimately interest rates. Higher interest rates are a concern because low interest rates have been an important driver of market gains and improving economic conditions over recent years.
It is important to put recent events into perspective:
- Stock markets enjoyed buoyant conditions leading up to this event. Over the 12 months to 31 January 2018:
Recent declines represented only a fraction of the gains over the past few years.
- the ASX All Ordinaries (assuming income reinvestment) returned 12.96% and
- the S&P 500 delivered an even more impressive total return of 26.41%
- Markets go up and down. While they tend to take the stairs up, they often catch the elevator down. Pullbacks of 5% or so are normal for equity markets and a pullback was overdue (particularly in the US). While the media tends to over play these events (the best way to increase readership) we need to resist getting caught up in the media noise and keep focus on the long-term investment plan. History shows sell offs are normal and markets ultimately recover.
- Our style of investing involves holding a diversified portfolio for the long-term and, where possible, buying a little bit more when markets go down. This approach has been an excellent way to protect and grow wealth over time.
- The economic outlook remains positive and the inflation remains well contained. While there is always an element of uncertainty, this is positive mid-term for equity markets.
It’s important for clients to understand your own situation and how your portfolio is constructed. Not all investments will be impacted by the recent volatility. For investments that are impacted, while market swings may reduce account balances for a period of time, what’s most important is ensuring your long-term plan remains on-track.
If market volatility remains a concern for you please get in touch by calling 1300 138 044 or visiting
your nearest Tasmanian Perpetual Trustees office.