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Don’t get spooked by the stock market correction

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Summary

We look at the facts after another tough week for markets.

2 min read

We may have seen more market volatility last week but, crucially, the all-important US economy has stayed in good health and the chance of a recession remains small. In our view the case for long-term investing is still sound.

Lower company earnings forecasts, Brexit uncertainty, upcoming US mid-term elections and the Italian budget have all contributed to a dampened market mood. As a result, we’ve seen stocks slide in Asia, the US, and the UK where the FTSE 100 reached a seven-month low last week.

But the most important economy of all – the US – is still in good shape. And what happens in the world’s biggest economy matters for the world economy.

Although the consensus among economists is that America’s GDP growth will slow over the coming quarters, the rate at which it is expanding remains healthy. Company profits there continue to rise, inflation remains subdued and there is still no sign of an imminent US recession – all of which support investing. Also, the US Federal Reserve’s monetary policy broadly still supports the economy.

Sven Balzer, Coutts Head of Investment Strategy, says, “It is difficult to keep a distance and look at the bigger picture when there is so much negative news flow in markets, but it is important to do so.

“There are some concerns out there for investors but it’s good to keep in mind that markets tend to get overly pessimistic quite quickly when expectations change.

“The correction we are seeing at the moment remains just that – a correction. Signals of an imminent recession remain low.”

The corporate picture in the US actually looks decent despite the recently reduced profit forecasts of some companies. As of last Thursday (25 October) just over 160 S&P 500 companies had reported their financial results for the third quarter of 2018 and, overall, profits were up 23% year-on-year, with sales rising 8%.

Earnings are more mixed in the rest of the world, however, highlighting the economic divergence we have seen this year as growth has continued apace in the US while slowing elsewhere.

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“It is difficult to keep a distance and look at the bigger picture when there is so much negative news flow in markets, but it is important to do so.”
Sven Balzer, Head of Investment Strategy, Coutts

Nothing new

Alan Higgins, Coutts Managing Director, Asset Management, says situations like the one we’re currently seeing are nothing new.

“In terms of what will happen next, we obviously can’t predict the future but we can look back and see what history has to show us,” he says.

“Looking at the S&P 500 index in the US, a good indicator of the wider economy, there have been 15 stock market corrections linked to sudden spikes in volatility since 1990. On 12 of those occasions the index rebounded and was delivering positive returns six months later. Two of the times when it didn’t happen were in 2008 – a year of extremes defined by the financial crisis.”

While these facts are compelling, it’s always worth remembering that past performance should not be taken as a guide to future performance.

 

Delivering diversification

At Coutts, diversification is one of our key investment principles and our portfolios are therefore not aggressively positioned towards risky areas.

We have only a mild preference for investing in shares over other, traditionally safer assets, and we recently invested more in government bonds – which tend to remain comparatively stable in this type of environment – in anticipation of the changing economic landscape.

As Sven Balzer explains, “When markets hit a bumpy patch, it becomes more important than ever to have a professional fund manager actively looking after your investments.

“At Coutts we constantly analyse market movements, political developments and economic data and make changes to our portfolios when necessary to keep them as well-positioned as possible. We aim to maximise opportunities, monitor risks and minimise damage.”

He adds, “We don’t see any need to make immediate changes to our portfolios following the recent market unrest – such times can be troubling but are not unusual for long-term investors. But as always we will keep a close eye on developments and stand ready to act if it becomes necessary.”

 

Past performance should not be taken as a guide to future performance. The value of investments, and the income from  them, can go down as well as up, and you may not recover the amount of your original investment.

About Coutts Investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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