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Shaking off Blue Monday

Blue Monday Market Crash

The latest stumble on the US exchanges may have shaken the global market, but the unpublished statistics point to a brighter long-term forecast.

The Dow Jones fell more than 1500 points at one stage on Monday, 5 February, the worst intraday rout in US market history, while the S&P 500 followed a similar trajectory, declining by 4.1% on Monday alone. It was the worst day for US markets since August 2011, when a downgrade to the US credit rating, among other factors, sent the markets into a spiral.

The ripples from the latest correction, as many are somewhat prematurely referring to the slide, were felt in markets across Asia and Europe. But contrary to the 2011 fall, there doesn’t seem to be a fundamental catalyst for Monday’s sell-off. The obvious candidate is continued unease in the markets, provoked by Friday’s 2.1% sell-off on the back of wage increase findings by the US Department of Labour, expected early interest rate hikes by the Fed, and the resulting inflation fears.

The deleveraging of institutional buyers with portfolio risk limits, and the market reaching the 50-day moving average may further have spooked investors. Add to this a sudden and dramatic increase on Monday in the Vix volatility index, Wall Street’s fear gauge; and quantitative trades by the so-called “machines”. The result: a very shaken market. In the aftermath, US Secretary of Treasury Steven Mnuchi allayed fears by shaking off Monday as simply a market correction and that market fundamentals – unemployment, company earnings, GDP – remain strong. A US recession resulting from overeager interest rate hikes seems highly unlikely when the economic indicators simply prove otherwise.

So, here’s the good news: these declines are not all that uncommon. The MSCI World Equity index dropped 6% during the latest market volatility, but the index has seen four double-digit percentage falls since the financial crisis. Similarly, US stocks have averaged a 10.6% peak-to-trough intra-year decline in positive markets. Although volatility remains high, US markets have already found their footing and rallied from earlier in the week. The Vix index has also dropped sharply by 33%. More reassuring is that since 1960 the median S&P 500 return in years without a recession has been 15%. Following past market volatility, the index has shown 12-month gains 87% of the time with a median return of 22%.

The old truism applies: Don’t panic. Yes, there is volatility at the moment, a lot of it, and it may lead to further flight as investors realign their strategies, but a long-term approach is now called for, which has always been central to our investment strategy at Carrick Wealth. Our client investment portfolios are diversified across asset classes to safeguard against these mercurial market movements and ensure the ride ahead is a smooth one, regardless of bumps along the way.

 

Mike Fannin

Director