Stock Markets and Your Reactions – What to do next
August 8, 2011
Here is a copy of an email I sent to all my clients this morning about the current stock market turmoil.
It is important to remember that while we cannot control the market snad all that goes on in the world, we can control our reactions to those events. Keep that in mind while you read on…
Like you we are watching nervousness and uncertainty play out on world markets, reminding us all that Australia is part of the global economy. We have spoken to a number of fund managers such as Russell Investments, who continue to monitor the situation and from these discussion want to share with you the following thoughts.
A gloomy global economic outlook sent investors on a mass exodus out of risky markets Thursday and into the refuge of US government debt, sending yields to yet another round of new 2011 lows. The intense flight into safe-haven Treasurys forced benchmark 10-year yields down more than 50 basis points since last Friday; there hasn’t been such a large one-week drop in yields since November and December of 2008, when Lehman Brothers collapsed, sparking a financial-market frenzy. This morning, the 10-year US Treasury note yields 2.40%.
Investors across the globe have been buffeted by economic and political turmoil in recent days. In the US, fears have turned from worries about a possible default by the US government to a weakening economic outlook. A string of recent weaker than expected economic data have pointed to a possible slowing of the recovery. Over the weekend we saw the lowering of the US credit rating by Standard and Poors (S&P). It is important to note that S&P merely rate the risk profile of a country or company – they do not determine whether they get any funds, so I would not expect this too impact on the desirabilty of investors to still hold US Bonds. However nobody seems to know what will happen on the stock markets around the world when they open later today.
In Europe, leaders are still working through a longer term solution to the sovereign debt crisis impacting peripheral countries such as Greece, Portugal and Spain. Investors are increasingly nervous that troubles are spreading to Italy and Spain, driving down stocks across the region and sending borrowing costs of peripheral nations soaring.
European stock markets plunged 3.4%, the largest one-day drop in more than a year, while US major indices continued the falls, ending down around 4.5%.
The breaking of short term technical levels, automated trading systems and the imposition of automated sell trade curbs in the US, fed the worries of traders.
Keeping market moves in perspective
- Despite last week’s extreme movements, there was nothing in terms of a fundamental change in the world economy that happened in the past 7 days. The fact is we remain in a volatile market environment, set against the backdrop of a grinding global recovery.
- It is helpful to put last weeks’ moves against the backdrop of the following key fundamentals:
- The recent softer US data is consistent with our long held view of many fund managers that economic data overseas will oscillate between good and bad for a while yet, but that the net effect is the continuation of a grinding recovery over the next year or more.
- Despite Eurozone debt concerns, core countries such as Germany continue to deliver strong growth, and one of the best performing sharemarkets in the world over the past year – despite everything going on with Greece.
- Equity valuations remain ok (on the cheap side of longer term averages). US earnings in particular remain robust with 75-80% of reporting companies in the current earnings season beating expectations – 43% of these by more than 5% (though most fund managers do expect US earnings growth to slow to a more sustainable pace going forward).
- US government bond valuations are now considered to be at extremely expensive levels. The debt ceiling/deficit cutting issues will be worked through and US default is an extremely low probability going forward.
- The central scenario for Europe is that sovereign debt worries will continue to muddle through for now, but with any agreement on a long term solution still a way off yet.
- Emerging economies remain the key drivers of global growth. Central scenario is for a soft rather than hard landing in China (slowing to 8% pa or so – still impressive).
- Its also real important to keep in mind that stock markets generally have 4 bad years in any 10 year period, with 6 good years. While every “crisis” is different, the cycle seems to remain constant. The issues now are economic and will fix over time. History has shown us that those who have rebuilt their portfolios have done so by taking the opportunity to buy quality investments at discounted prices. Those who have lost and sworn off investments forever and locked in the biggest losses are those who bought high and sold low.
- Whenever there are large market-driven movements like last night, it is likely there will be continued volatility until things settle down again.
- The key point you as an for investor is not to panic. Many of the people we speak with remain confident that while market conditions will continue to be volatile over the rest of the year, now is not the time to make knee-jerk reactions and run to cash (as many did in the depths of the GFC – with terrible results in the ensuing recovery).
- Keep your head, stick to your long term strategic plan, and look through the current noise to keep headlines in perspective (especially against the backdrop of market valuations and economic fundamentals). There is nothing in the past week or so that should change your medium to long term investment strategy.
Volatility of this nature has us all concerened and we will remain in regular contact with various fund managers over the days and weeks ahead. We will take all necessary steps to keep you appraised of any new developments and that you give me a call to discuss anything that you need to at anytime.
Please don’t let newspaper stories and headlines be your source of information, as we kow with al stories, sometimes the truth gets in the ways of metaphors, so as I said before, give me a call.
If you do have any questions about this or would like to know more about us, please email me at firstname.lastname@example.org or give us a call on (07) 5577 8653
This publication has been prepared to provide you with general information only. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, you need to consider (with or without the assistance of an adviser) whether this information is appropriate to your needs, objectives and circumstances. This information is provided for persons in Australia only and is not provided for the use of any person who is in any other country.