For all the complexities that surround investment decisions, and the factors that can see markets shift, it often boils down to interest rates and its close relative, inflation.
The recent selloff in the equities markets, which has seen the Dow Jones plummet more than 2,000 in two tranches and lose 10% of its value, was triggered by a number of factors.
A heating-up of the global economy, set to grow 3.9% in 2018, and subsequent wage rises has created an inflationary pressure. With the US Federal Reserve already leaning towards a number of interest rate rises in the coming 12 months, bond yields have increased. The chance for low-risk returns from both bonds and savings interest were among key factors that triggered the sell-off.
A pickup in share volatility, alongside Amazon’s announcement that it was considering a move into the healthcare sector, moved the markets.
“Ultimately, the cause of this sell-off has been an abrupt change in sentiment amongst investors as they focused on concerns that inflation may be returning,” according to Architas senior investment manager Nathan Sweeney. “However, we believe this is just a correction of a market that had got ahead of itself and where valuations had become more expensive.”
Tom Elliott, deVere Group’s international investment strategist, concurs with Sweeney. He pointed to a myriad of circumstances, such as wage growth figures, central banks tightening monetary policy, and the markets reaching all-time highs, as leading to the sell-off. A pickup in share volatility, alongside Amazon’s announcement that it was considering a move into the healthcare sector, moved the markets.
“After months of strong gains, amid low volatility, the herd had become skittish and turned,” said Elliott. “It has led to a sense of relief in some quarters, since the low volatility that marked 2017 had hurt traders who rely on volatility to make short-term gains.”
But Architas’ Sweeney believes the economic backdrop “remains positive”.
“There is solid global growth, mild but rising inflation, and central banks remain very accommodative – they are unlikely to abandon their cautious approach now,” said Sweeney.
“We don’t believe the risk of recession – which could trigger a deeper market sell-off – has risen significantly. We are re-assessing the dynamics of each asset class, and at this stage the sell-off could be an opportunity to reposition portfolios, while always remaining diversified.”
This was written by editorial staff at Professional Adviser. All views are from the publication.