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Why have stocks been falling this week?

Investment Manager Alex Neilson explains why there has been volatility in the stock market this week

Topic: Economy, Investing

Looking at the news this week you could be forgiven for thinking the sky is falling. ’Global Stock Market plunge’. ‘Biggest point loss in history for the Dow’. If you were to believe the headlines, it looks like 2009 all over again.

Sounds a bit dramatic, doesn’t it?... I agree

Let’s start by looking at where we have come from. Yes Monday was the biggest point loss for the US Dow Jones index in a single day, but it’s also true that over the last year this index, and many others, have repeatedly hit new record highs without a setback, which isn’t particularly healthy.

Falls in the market after stretches of positive gains, or ‘corrections’ as they are often referred to by investors, are a natural part of the investment process. However, just like anyone correcting you, they aren’t always particularly palatable!

So what has been happening with the stock market this week?

Let’s start with the obvious. Government bond yields (that’s the amount governments have to pay in interest to anyone lending them money), have been steadily rising in 2018, driven in part by expectations that the world economy is going to have a good year.

Sounds good for stocks, I hear you saying. Paradoxically, not in every case.

Many investors are starting to anticipate more interest rate hikes from Central Banks due to the health of the economy. Low rates have supported stocks over the last few years, as companies have found it cheaper to borrow money and the worry is that as rates move upwards, profits will go in the opposite way. If company profits fall, so do the value of shares.

Next up, there has been a very popular trade over the last few years called ‘short volatility’, I won’t go into huge detail as it could send you to sleep, but short volatility is basically betting that stock prices won’t move much up or down each day. And they haven’t. For years. It’s been an extraordinarily popular and profitable trade in financial markets.

The problem is that volatility reached such low levels with this trade that it was bound to reverse at some point, and this started on Monday. The volatility index jumped over 100% in a day, which has made some traders sweat - turning a small sell-off into a 4% fall.

So should I be selling my stocks?

In short, you shouldn’t be selling if you can afford not to. Stock markets are excellent long-term savings vehicles, and that’s why we advocate a long-term mentality here at Click & Invest. Falling stock markets always look like the end of the world to investors, however, trying to time markets is a fool’s game.

What you can do is invest your hard earned money over a period of at least three years or more and seriously enhance your chances of coming away with a positive return, due to the magic of compound interest.

Our underlying outlook for global stocks is positive. Global growth is building momentum, banks are in a much safer state than 2009 and regulation has been tightened in all corners. While we are certainly not ignoring this week’s sharp sell-off, we view it as a natural reflection of the markets. Our portfolios are designed and built to survive exactly these conditions.

What’s in my Click & Invest portfolio?

We blend different assets into our portfolios to try to reduce risk during market falls. Whereas the stocks and shares portion has fallen over the last two days, the bond, gold, and alternatives portion is there to protect value in times such as these.

This is why we have built our portfolios to contain different assets, knowing that each will perform independently during different market environments to smooth returns. Our team of active managers will not only respond immediately to fluctuations in the market but will also take advantage of any corrections to look for attractive new stocks.

All investment carries risk and it is important you fully understand these risks and are willing to accept them. You may get back less than you invested.

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