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Stock market slump: time to buy or seek shelter?

Stock market slump: time to buy or seek shelter?

by Daniel Grote Feb 06, 2018 at 10:21

 

Investors have woken up to painful losses this morning after heavy falls in US markets prompted a wave of selling.

The Dow Jones' 4.6% fall yesterday is the biggest since August 2011, as is the broader S&P 500's 4.1% drop, and other global markets have followed suit. Japan's Nikkei 225 closed 4.7% lower while Hong Kong's Hang Seng was down 5.1%.

For investors looking for some silver lining, European markets have at least lifted from the 3% falls at which they opened.

At the time of writing, the FTSE 100 had climbed from a low of 7,118 at the open to trade at 7,216, down 1.6% on the day. The German DAX was trading 1.8% lower and the French CAC 40 was down 1.5%. 'Futures' on the US S&P 500 have meanwhile climbed 2.6% from their lows.

The crucial question is whether today's falls represent an opportunity to pick up some bargains, or the start of something worse.

'More wrenching trading sessions'

Alex Scott, chief strategist at Seven Investment Management (7IM), is remaining cautious, warning that the spike in stock market volatility has 'not yet played out and could well involve more wrenching trading sessions for investors'.

'We have been concerned by demanding equity valuations and by apparently complacent investor sentiment, evident in such low stock market volatility,' he said.

'With levels of volatility so low, there is a risk that a small rise could lead to a larger market reaction, as investors receive a reality check.'

Jim Reid, strategist at Deutsche Bank, meanwhile warned in September that the next financial crisis appeared inevitable, and would be likely sparked by a withdrawal of stimulus from central banks, coupled with higher inflation.

He argued that the sell-off of the last few days, sparked by fears of higher US interest rates following better-than-expected jobs data, showed 'how easy it would be to get to the next financial crisis if inflation really started to misbehave, as most of this price action stems from a hint of it'.

Reid said that prospects for global markets this year hinged on inflation, especially in the US. Should it rise dramatically, 'the glue that has held the "carry" trade - and associated multi-year risk rally - will start to unfold very quickly and the timing of the next financial crisis will be brought forward', he said.

While Scott isn't predicting the next financial crisis, his caution is reflected in the positioning of 7IM's funds. As 'multi-asset' funds, they are able to invest across different asset classes, and the group is holding high levels of cash and short-dated bonds, together with 'alternative' income strategies, which aim to be uncorrelated to the bond and stock markets.

'Our strategy over recent months has been to operate with some caution: to participate to a degree in the very strong stock market momentum, but to remain underweight equities overall, and looking to include other defensive measures where possible,' he said.

'We have been very wary of government bonds, especially gilts and European government bonds, where yields remain too low.'

Shares still the best bet

But Fidelity fund manager James Bateman, who likewise runs 'multi-asset' funds, is more optimistic about prospects for shares, and can see buying opportunities ahead.

'My money remains on equities - but rotating (and buying on weakness) into "value" areas of the market that have lagged in the recent momentum-driven rally,' he said.

He welcomed the sell-off as a sign of health in stock markets. 

'The tech-fuelled rally in the US had long lost any sense of reality in its valuations, the prospect of inflation remaining low forever could not last, and we have a new and untested Fed chair. It would be more worrying if markets didn’t react to all of this,' he said.

'At this stage of the cycle, the money is made by keeping your head when others are losing theirs.'

James Knightley, economist at ING, agreed the sell-off appeared to be a correction 'rather than the start of a broader re-evaluation for earnings'.

'The US economy is in great shape right now and the financial sector is in a more robust position than it was ahead of the last major sell-off,' he said.

'That is not to say that we won't see further falls in the coming days, but in an environment where growth is good and earnings are expected to rise globally, there are decent underpinnings.'

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Comments  (12)

  • William Phillips: 

    Is program trading implicated? There is a lot more of it installed than during the GFC ten years back.

    More 'flash crashes' ahead? Robots in the driving seat?

    11:38 on 06 February 2018

  • Jezzer: 

    Oddly enough my bond and alternative income funds have fallen more than my equity funds in the last day or so. I know high yield bonds can act like equities at times like this, but I didn't expect them to fall up to 2x equities...

    12:46 on 06 February 2018

  • PaphosStan: 

    Jezzer

    Bonds had held up remarkably well despite interest rate rises on the horizon but the inevitable has perhaps come to pass at last

    16:09 on 06 February 2018

  • Andrew Stevenson: 

    William Phillips

    I remember very well, on day one of the 1987 crash, traders being completely overwhelmed by computer programs initiating sales as each stop loss point was reached. I presume with modern high speed trading and computer programs that are capable of analysing huge amounts of data from many sources at speeds that no human can match, that something very similar is happening now.

    Perhaps it works both ways and we should keep writing the word 'buy' in case our comments are being analysed as well ?

    16:27 on 06 February 2018

  • Alastair Kendall: 

    Jezzer's comment is interesting ....I hold Ruffer and have watched it pretty much follow the market down with everything else; got to admit that is not what I was expecting.

    17:29 on 06 February 2018

  • anglo29: 

    So are we to accept that computer programmes simply respond to panic, then panic feeds upon itself.......and real fundamental values somehow get crushed underfoot in the rush to sell?

    17:33 on 06 February 2018

  • Jezzer: 

    Alastair - which Ruffer fund? I hold a decent chunk of Janus Henderson UK Absolute Return (the one that's just been panned after revealing its true charges total up to about 4%, since MIFID II kicked in) It's down just over 1% in the last week, which feels pretty good under the circumstances. Having watched it for some time, I use it as a proxy for a long-term holding in cash, as its volatility is so low and it's roughly keeping up with inflation (the money is a deposit intended for major home improvement work, which is taking years to arrange, so I didn't want it to lose too much value while we prevaricate, er plan) . It's still up on gold in the last week - that's down 2%, although that has risen in the last few days so could well cross over soon.

    For gold fans out there, it's an interesting exercise to overlay the price of PHAU with this fund, over various periods of time.

    17:54 on 06 February 2018

  • halfinchnut: 

    As Jezzer commented, Corporate bond funds have been hit particularly hard, IPE, NCYF, CMHY and CYN have all dropped more that the general market, but the yields have risen, so I have taken the opportunity to sell off partial holdings of SMT and FGT which had risen rapidly over the last year or so, and channelled some good profit into the high yielders.

    19:04 on 06 February 2018

  • Peter Sm: 

    This is computer driven, by investors setting unrealistic sell points and creating a domino effect in the market.

    20:35 on 06 February 2018

  • anglo29: 

    Thinking of some extra investment diversity, anyone had experience with Building Society Permanent Interest Bearing Shares (PIBS)?

    09:23 on 07 February 2018

  • Alastair Kendall: 

    Hi Jeezer. I hold RICA (the investment trust version). Funnily enough I also hold Janus Henderson UK Absolute Return, which as you say performed well through the turmoil. I also hold Highbridge which is a mutli-strategy hedge fund which also did very well.

    10:02 on 07 February 2018

  • Michiel Blomqvist@Citywire: 

    @Peter SM, "This is computer driven, by investors setting unrealistic sell points and creating a domino effect in the market."

    Unless I'm mistake, the sell points are triggered when they are reached. Some unhealthy stop losses triggered - eg. I had a stop loss for SMT @443p after close at 444p. It was triggered at 8:00 but sold at 8:35 for 421.6p! very disappointed with dealer but prolly no come back there..

    17:03 on 12 February 2018

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