44 words, three days and $4 trillion

07 Aug 2019

Terence Moll, Chief Strategist

We see the pattern again and again. There’s a piece of bad news. Markets sell off. Media pundits declare the world is going to hell in a handbasket. Investors panic and markets sell off some more. More pundits, more panic.

This cycle continues until markets bottom and begin recovering, and it becomes clear that the world is not blowing up after all. And life goes back to normal, except for those investors who sold at the bottom and locked in big losses.

In the last week, we have had three days of terror. Between its high last Thursday morning and its low on Monday afternoon, the S&P 500 fell by 6.4% – the sharpest fall all year. Most other markets fell in line with it. Global stock markets lost about four trillion dollars, which is more than one and a half times the gross domestic product of the UK.

And, as usual, there was a scary story. This time it was trade and technology wars, as the economic and political tensions between the USA and China ratcheted up. Donald Trump’s 44-word tweet on 1 August about new tariffs was one of the most expensive communications in history. Markets are notoriously jumpy, and a few bad days say very little about the future

We are uneasy about what’s going on in the US, since it seems to be shifting towards economic policies that are designed to benefit its narrow interests at the expense of the rest of the world. This could have long run implications for company supply chains, profitability and global growth – most of which are negative.

As long-term investors, though, our long-term view of the world has not changed in the last week. We remain slightly cautious about the prospects for global growth and equities, and have kept our small equity underweight.

But we don’t think that a global recession is looming. Recent economic numbers have been weak but not disastrous. While trade tensions are likely to rumble on at least until the US election late next year, we think it’s in the interest of all sides to avoid a blow-up.

We reckon that long-term investors should not get caught up with short-term movements in financial markets. Markets are notoriously jumpy, and a few bad days say very little about the future. Moreover, markets often overreact, which can provide opportunities to the brave. If markets continue falling we’d be more inclined to buy rather than sell.

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