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Article | 06 February 2018 | Investments
We don’t believe the risk of recession – which could trigger a deeper market sell-off - has risen significantly
Stockmarkets started the year strongly as investors expected global growth to continue and the US economy to benefit from the tax cuts announced by President Trump at the end of last year.
But after more than a year of low volatility and a generally positive market, this week has seen some big falls in global stock markets. The S&P 500, the main US index, fell 4.1% on Monday, the worst daily fall since 2011.
Bond markets had a different start to the year, with yields rising and prices falling as the market continued to adjust to the fact that quantitative easing, the injection of money into the economy, is being reversed in the US and interest rates are rising.
Good jobs data in the US caused bond investors to grow concerned that the Federal Reserve was behind the curve and would need to raise interest rates even faster and higher than expected in order to keep inflation in check. This fear spilled over to the US stockmarket and subsequently to global equity markets.
If the era of cheap money is coming to an end it has big implications for businesses and economies with many companies not financially strong enough to survive if interest rates rose to three or perhaps even four per cent.
Ultimately, the cause of this sell-off has been an abrupt change in sentiment amongst investors as they focused on concerns that inflation may be returning. However, we believe this is just a correction of a market that had got ahead of itself and where valuations had become more expensive.
The economic backdrop remains positive. There is solid global growth, mild but rising inflation, and central banks remain very accommodative – they are unlikely to abandon their cautious approach now. We don’t believe the risk of recession – which could trigger a deeper market sell-off - has risen significantly.
We are re-assessing the dynamics of each asset class, and at this stage the sell-off could be an opportunity to reposition portfolios, while always remaining diversified.