Gains made by US stock markets in 2018 disappeared into thin air this month over concerns about the global economy and a potential US/China trade war.

The tech-heavy Nasdaq fell into correction territory, down 12.4% from its 29 August record closing high. It suffered its biggest one-day decline since August 2011 of 4.4% to 7,108, according to Reuters. Shares in technology giants were pummelled, with Amazon dropping 5.9%, while Facebook and Apple fell 5.4% and 3.4% respectively.

Meanwhile, the Dow Jones Industrial Average dropped 608 points or 2.41% to 24,583.42, while the S&P 500 was down 84.59 points or 3% to 2,656 on October 24, as reported in Investment Week. The VIX or ‘Fear Index’ also rose 4.52 points to close at 25.23; its highest close since 12 February.

According to CNBC, the Dow has now dropped 7.1% in a volatile October, while the S&P 500 has fallen 8.9% and the Nasdaq has slumped 11.7%. Asian stockmarkets have since been impacted by yesterday’s US sell-off, with the Nikkei 225 and Topix slumping 3.6% and 2.9%, respectively, while Hong Kong’s Hang Seng was down 2.1%.

The UK has also seen an ‘autumn shakedown’.

Gaining an understanding of the market at this point is notoriously difficult. Have shares bottomed out, or is there further to fall? For those managing investments it can be a nervy time.

“It’s super-ugly, and who knows when it will be over,” Adam Sender, chief investment officer of Sender Company and Partners, told the Financial Times last week.

For deVere Group international investment strategist Tom Elliott, the message is “sit still for now”.

With interest rates creeping up, and concern that the best of the current economic cycle is behind us, it is “unsurprising” that defensive assets such as US treasuries have come into demand.

Although US inflation rates are low, their Treasury is looking to “normalise” its interest rates. And strong corporate performance could tail off in the future.

Despite such headwinds, Elliott says that most portfolios should have spread their risk appropriately to take into account market movements.

“Assuming that they are invested across the range of financial assets, from defensive government bonds to riskier growth-orientated stocks, and that they have a long-term investment horizon, a ‘do nothing’ approach during spells of volatility is shown by financial history to be the best approach,” said Elliott.

In a similar vein to Elliott, financial planner Warren Shute said that while market volatility can’t be controlled, asset allocation and risk exposure is controllable.

“Global markets may be selling off, all I suggest you do for your clients is ensure their asset allocation is right based on their risk tolerance (the sleep well at night factor) and their risk capacity (the ability to continue to sleep in the same bed going forward),” said Shute.

Kevin Reed is one of the UK’s most senior accounting and finance journalists. He is a former editor of Accountancy Age and Financial Director, and writes regularly on corporate and professional services governance.

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