The first thing to do is put the recent market moves into context.
These have been sharp falls following a swift change in sentiment, but they are small in relation to the rises recorded over the past year.
For instance, the S&P 500 has recorded the largest peak-to-trough drawdown (-7.76%) in local currency terms but is only down 0.8% since the start of 2018. The index’s 1 year return is very attractive 17.6% in USD terms.
The FTSE All Share’s peak-to-trough return has fallen more this year, -4.54% following a peak-to-trough drawdown of -5.61%, but the FTSE is still up 6.95% over 1 year.
What prompted the market moves? Well, strangely it was strong economic data in the US, in particular rising wage growth that led to the shift in sentiment. This strong jobs data led to a sell-off in US Treasuries which in turn caused nervousness within equity markets. One of the reasons equity markets have run so hard has been the low bond yields (backed by benign inflation and reasonable economic growth). Corporates have been encouraged to gear up their balance sheets, it has led to M&A activity and in turn, investors have been incentivised to move into riskier equities from lower yielding bonds.
The fact that the US Federal Reserve has a new chair – outgoing chair Janet Yellen formally handed over to Jerome Powell on Monday – was another source of uncertainty.
For us, the key point to emphasise is not to panic, think long-term and don’t succumb to the temptation of over-trading. The Flying Colours portfolios are well diversified, cost efficient solutions built for the long-term. We hold a blend of defensive assets like government bonds and cash, which should help protect in times of market stress, and also equities investing in stocks listed in the UK, Europe, the US, Japan and emerging markets.
We would encourage our advisers to remember that investing is a long-term pursuit. While a 5-10% fall may feel a lot, it means little in the context of a 10-year time horizon. The headlines that the financial press are carrying today are deliberately sensational. Markets do experience drawdowns and we see these corrections as a healthy response to recent market rises.
Chairman, Flying Colours Investment Committee