Stock Market Correction

Written by Lisa Nicholson

A fall in market value when compared to the highest point in the previous 52 weeks.

We are experiencing a stock market correction this week and I thought it prudent to drop you a line to explain this in a little more detail. Wise investors tend to welcome this ‘pull back’ which allows markets to consolidate before moving forward. Each ‘Bull Market’ in the last 40 years has had a correction and it’s a natural part of the market cycle.

At Prosperity our view is as always; calm, confident and focused. Of course, we don’t have a crystal ball and can’t guarantee what will happen next, but we are continually vigilant on behalf of our customers and work closely with our chosen product providers. Our investment strategies are designed to meet our client’s long-term goals and market change, in either direction, is to be expected.

If you would like to know a little more of the detail, please see below:

Markets are currently in a correction phase after a strong January and this can be seen in most equity markets. This sell off can be attributed to two factors in our view, overconfidence in stock markets and concerns over interest rates/inflation.

January was one of the strongest months on record for equities and the positive return seen in the month was the 15th consecutive month of gains seen in the US index. With the optimism created by the Trump Tax reform many indices began to price-in a significant amount of good news and bythe end of the month some indicators were suggesting the market was overbought. 

This correction comes following a recent sell off of more risky assets after a long period of low volatility and is a healthy feature of a bull market. It also coincides with bond markets selling assets gradually over the last months of 2017. The market’s attention became extremely focused on Friday’s US employment report with the release that US wage growth had increased 2.9% year on year, above expectations. Wage growth is a key indicator for future inflation and therefore investors have begun to ‘price in’ higher inflation, and therefore higher interest rates that they believe central banks will need to adopt to combat price increases.

For our Brooks Macdonald customers their view for 2018 remains unchanged. They say:

“Corporate earnings growth has been positive, and we note that of the US companies that have reported Q4 earnings, three quarters of them have exceeded analyst expectations and many have guided that 2018 will be better for their companies than the market is pricing in. Wage growth, if it continues, may start impacting profitability at some point however we are inclined to wait for further confirmatory signals before deciding on any course of action. Some inflation, via wages, is positive for consumption and for the economy more broadly, so the key area we will be watching is whether wages carry on rising or whether this is merely bringing wage prices in line with where the US Federal Reserve wants them to be. In summary we still believe equities are more attractive than bonds but are focusing on ensuring that portfolios are balanced ahead of 2018 which we expect to be more volatile than recent years. By investing in a broad range of themes, geographies and foreign currencies we are able to diversify equity risks. Similarly, in the non-equity space we are looking to structured notes, convertible bonds and other alternative asset classes to help dampen the inherent volatility of equity markets.”

 

The information in this article are the views of Prosperity as at 07/02/2018 and the accuracy and long-term output cannot be guaranteed or foreseen. This information is not intended to be nor should it be considered to be advice and you should contact your financial adviser if you wish to receive advice or discuss these matters further. The investments recommended by Prosperity Financial Advisors & Stockbrokers are not guaranteed, and capital values and income can go down as well as up. Past performance is no indicator of future performance.