by Patrick Garrett Almost a month ago, investors were stung by a sharp drop in global equity markets. Headlines fuelled the fire of investors’ natural concerns, with words such as “meltdown”, “crash” and even “Armageddon” appearing frequently in news reports around the world.
As the CEO of a robo-advice investment company, I fielded questions about how I felt and what, if anything, Six Park was going to do about the change in market conditions.
The simple answer? We’re not making any changes right now, and here’s why.
US share markets dropped about 10% over several days – technically, a market “correction”. The correction was driven mainly by fears of inflation accelerating faster than current expectations, which could drive interest rates up faster than current expectations. Both of these metrics have been at historic lows, so with global growth improving, one would expect inflation and rates to rise over time.
Six Park analysis shows that 10% corrections happen in global markets around once a year, over the long term, and we’re coming off an unprecedented period of low volatility, so this recent market pullback may seem scary to some, but it’s in fact a part of normal market cycles.
Should you sell when the markets are volatile?
Six Park and our customers are very fortunate to have a highly experienced Investment Advisory Committee whose members have been involved in asset management and/or the provision of financial services through volatile times like the past two weeks.
Actually, they’ve been through much more difficult and volatile times and investment cycles, so they are adept at what we call “pothole spotting”: assessing the investment landscape, identifying real disruptive events as they start to surface, making investment adjustments only when necessary, and avoiding common investing mistakes such as overreacting to common short-term market gyrations.
So, we advised our clients to remain calm and ride out the volatility as we continue to assess and monitor the overall market landscape. Since then, most markets have recouped half or more of their losses and the S&P 500 in the US subsequently had its best week since 2013. There have been signs that the US economy continues to grow but is not overheating. To have sold on fear a few weeks ago would have been a classic investing mistake.
The Bloomberg chart below shows the normalised returns (baseline start of zero) for the S&P 500 (orange) and the ASX 200 (blue) indices over the past year. This does not include adjustments for distributions, just the index prices.
Key takeaways:
The correction was not actually not a major market crash when viewed through the lens of the past year, let alone the past five years.
- The S&P 500 is actually up nearly 2% for 2018 so far. US indices are generally considered barometers for overall global market conditions and trends.
- Even though the ASX 200 only dropped about half that of the S&P 500 (~4% versus ~10%) during the “correction” phase, exposure to international markets can be a very useful form of investment diversification as evidenced by the relative gains over the last year.
What will Six Park do next?
Among other things, a key focus for Six Park is assessing the following:
Will a (likely) increasing rate environment lead to a reasonably well-managed normalisation of economic conditions, ongoing steady global growth and employment and a managed inflationary environment, or will sudden, larger-than-expected interest rates increases put the brakes on global growth, leading to a recessionary environment?
We continue to believe that the latter scenario (recession in US or elsewhere) is not likely to play out over the next year given the data to date. But we are watching this space carefully.
Our job at Six Park is not to answer this kind of question definitively, which is impossible to do correctly on a regular basis.
As a robo-advice investment company, what we will do is:
- Assess the potential and most likely scenarios;
- Maintain our investment strategy accordingly;
- Prepare for any major outlier events (real disruption, not one data point on jobs) and then make adjustments based on those suggested by our algorithms only when we see such a real “pothole” (significant and potentially long-term change in market influences).
Beyond the next year? We assess that outlook on a regular basis and our customers get the benefit of that human oversight within our automated, low-cost investment management service.
The message to investors for now remains the same: Stay calm, get and then remain properly diversified, and keep your investment costs low.