August Market Commentary - Volatility Resumes

Posted by Simon Moore on August 17

Market Volatility Resumes


Market volatility rose earlier this month. The market has been very calm recently. This means that sharp up or down days for stocks have historically been quite common, but have been rarer than one might expect in recent months. With tense exchanges between the US and North Korean leaders, the risk level implied by the financial markets (the VIX) increased as did the size daily up and down moves in the markets.

However, Korean tensions aside, this transition in the markets should be viewed more as a return to normal. The markets have been especially calm so far in 2017. We view temporary ups and downs as a perfectly normal part of investing.

There are always areas of concern for the markets whether tensions on the Korean peninsula, differing opinions on Brexit, growth risks in China or political upheavals in Brazil to name just a few recent examples. The key is to look through the shorter-term moves, because over periods of years, or even better, decades diversified portfolios have tended to deliver attractive returns over time based on history.

 

UK Economic Growth Slows

The UK economy grew at a 1.7% annual rate in Q2 (the 3 months to June) according to the Office of National Statistics. This was a little slower than expected. The services sector of the economy is performing well, but other areas of the economy such as construction and manufacturing appear weaker.

Annual UK inflation (changes in prices) remained steady at 2.6%. House prices rose just over 2% for July, according to the Halifax survey. This is a slower rate of house price growth than we’ve seen in recent years.

The general picture is that the UK economy currently is slightly weaker than many expected, and expanding at a slower rate than in recent years. Basically, by various economic measures, the economy is moving in the right direction, but not currently not as fast as many would like. 

Remember, this is one reason why all Moola portfolios are internationally diversified. It’s possible than UK growth could temporarily stall. In fact, we’re not singling out Britain, this could happen to any country over the coming years, but by holding investments globally, we believe your portfolio is more balanced, and not excessively exposed to risks in any particular country.

 

The Risk Of Focusing Only On Shares

As an investor, it can be tempted to always see the grass as greener on the other side. For example, for much of 2016 and 2017 so far, shares have done relatively well, on the other hand, returns to bonds have been more modest. This means that if you look at a diversified portfolio relative to a share index like the FTSE-100 or S&P 500 the diversified portfolio will generally see slower growth in when compared to stock markets, because of the bonds it contains.

However, rising markets have historically be punctuated by periods of decline, which can last months or sometimes even years. In those markets holding bonds is very valuable as high-quality bonds can potentially rise in price as shares fall.

As a result, it’s important to consider diversified portfolios across the full, multi-year economic cycle. Stocks often look like the asset to focus on as the markets rise, but in falling stock markets, bonds can look equally attractive as means to preserve capital when other assets are potentially losing money. As is typically the case, the truth is found somewhere in the middle with a measured combination of both asset classes that can smooth your returns whatever the market is doing.

 

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Written by Simon Moore

He was previously CIO of FutureAdvisor, a US digital advisor. His most recent book Digital Wealth, explains automated investing. He studied economics at Oxford, and completed his MBA at the Kellogg School of Management.

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