Market Volatility

History of Sharemarket corrections – An Anatomy of equity market corrections

/ Kiwi Investor / 10 Comments

There has been lots written placing the current US stockmarket correction into a historical context.

The analysis of this blog draws on recent analysis undertaken by Goldman Sachs.

As you know, 2018 started out as the strongest start for global sharemarkets in over 30 years. The S&P 500 was up over 7% at one stage during January 2018.

The US equities bull market has been going since March 2009. This is amongst the longest period in history without the US sharemarket entering a bear market. The US sharemarket is up over 300% since 2009.

A bear market is usually considered to have occurred when sharemarkets fall by more than 20% in value.

A sharemarket correction is a fall in value of between 10% and 20%.

Volatility was at historically low levels over 2017. The US sharemarket, as at the end of January 2015, was up for 15 consecutive months and endured the longest period since 1929 without falling in value of more than 5%.

The fall in early February ended 499 trading days of the market not incurring a fall in value of more than 10%, which is amongst the longest stretch in history.

Records have been set and then broken!

 

With regards to bear markets and corrections, Goldman Sachs had some interesting analysis.

Corrections

There have been 22 corrections since 1945 of over 10%, and many more of less than 10%. The average correction is 13% over 4 months and takes 4 months to recover.

Bear Markets

There have been 14 bear markets, the average fall in value is 30% over 13 months and take 22 months to recover.

 

My own thoughts

Generally a bear market (i.e. 20% or more fall in value) does not occur without a recession (a recession is often defined as two consecutive quarters of negative economic growth).

The key forward looking indicators, such as an inverted yield curve, significant widening of high yield credit spreads, rising unemployment, and falling future manufacturing orders are not signalling a recession is on the horizon in the US.

Therefore, if you are playing the odds, the current correction might have further to run but it is unlikely to turn into a bear market.

 

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Equity Markets Keep Falling

/ Kiwi Investor / 3 Comments

The equity market volatility from last week continued into this week.

The Dow Jones has experienced its worst week in two years. US equity markets reached “correction” territory (a decline of 10% from the peaks in January).

Concerns over higher longer term interest rates and a more aggressive Federal Reserve Fed Funds Rate tightening path than expected are the backdrop to the recent downturn in markets.

It also appears that the short VIX (volatility) products significantly added to market volatility. A good explanation of how these inverse volatility products impacted on market volatility can be found at $XIV Volpocalypse – A Sea of Disinformation and Misunderstanding

The US inflation number on February 14th has taken on heightened importance and will be the focus of markets this week i.e. a likely source of volatility

What has changed? Not much.

As expected prior to the “market melt-down” volatility was expected to pick up from historical lows and that interest rates would rise over coming months. Albeit the volatility has occurred more abruptly and violently than anticipated (as it often does).

US longer dated interest rates have reached 4 year highs but remain near historically low levels.

The global economy is characterised by synchronised economic growth. It is expected that all 45 of the larger economies monitored by the OECD will experience growth in 2017 and 2018. It has been a while since this has occurred. In the US unemployment remains at near historical lows and financial conditions remain supportive of ongoing economic activity. US equity markets are still up over 10% for the last 12 months.

It is a good idea to go back to what was being said prior to a large market event.

The comments by Mohamed El-Erain, the chief economic advisor at Allianz, at the Inside ETFs conference 23 January 2018 are a good reference point for the current market situation.

El-Erain told the conference we are not in an asset bubble but that we should expect a higher level of market volatility in 2018. Mohamed El-Erain: We’re Not in a Bubble

His comments focussed on the fact that the US Federal Reserve (Fed) would continue to normalise monetary Policy in 2018 e.g. lift interest rates over the year to more normal levels while also reducing the size of the Fed’s Balance Sheet.

El-Erain noted 3 key risks for 2018:

  1. Geopolitics e.g. Korea and the Middle East
  2. What happens if the four major Central Banks try to normalise monetary at the same time i.e. Fed, China, Japan, and Europe
  3. A market accident e.g. a liquidity event in say an ETF given an over promise to deliver

The last risk is very insightful given the events of the inverse volatility products over the last 10 days. I am quite sure El-Erain did not expect that risk to materialise so quickly!

 

So if things change, you change your mind, to badly paraphrase Keynes. Not sure that things have changed that much but maybe a realisation interest rates are actually heading higher and the very low level of market volatility experienced cannot last for ever. The US equity market is still trading on high valuations.

Whatever you do don’t panic. The Topic of my next post.

 

Please see my Disclosure Statement

 

Global sharemarkets fall sharply – what to do?

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The run of sharemarket records has been broken.

After reaching all-time highs and experiencing the longest period in history without a decline in value of more than 5%, US equity markets have fallen the most since 2011, the most in 6 ½ years.

The sell-off comes after: a record start to the year, +5.6% (the market has retraced all of January’s gains), a strong US employment report on Friday, including a larger than expected pick-up in wage growth, and rising US Treasury yields over the previous days.

Combined the fear of greater than expected increases in interest rates by the US Federal Reserve (Fed)), high market valuations, and an over brought market (technicals) sentiment has turned quickly, leading to the sharp fall in the market over recent days. More may be likely – who really knows?

Nevertheless, a pull-back in the market has been long overdue and the underlying fundamentals remain good e.g. global synchronised growth

What to do in times like this? Listen to your investment advisor, ensure you have a truly diversified portfolio, and take a longer term approach.

This article is timely given the recent market volatility.

It highlights Goal-Based Investing and 4 other trends to look out for in 2018.

I hope the people that are advising you are across these topics, in particular:

  • Goal Based investing – this is key focus on this Blog site. This is fundamental.  The focus on how much growth assets one should have, a return and benchmark focus, and target date type funds may not deliver desired outcomes to meet retirement needs;
  • Responsible Investing. A responsible investing and ESG framework / policy is important for sustainable investment outcomes;
  • Uncertainty – well that has certainly risen over the last couple of days! Nevertheless, it was in the background given the very low level of interest rates and the high valuation of equities, the US in particular. The article points to the increasing allocations to alternatives as a means to truly diversify portfolios and make them more robust in the face of market uncertainty and volatility.
  • It is likely that ETFs could play an important role in meeting investment objectives

 

Bitcoin has lost its shine!

 

 

Please see my Disclosure Statement