Financial Markets Update 8th August 2019
The last few days have seen share markets suffer falls of concerning levels. Again I have been closely watching the markets and talking to fund managers as well as reading as much as I can to help understand the cause and what action should be taken if any.
What has happened?
As always there are a number of factors involved. The trade war is a big part of this but not the only issue and it is also interacting with other issues. The main points are;
Last week the US Federal Reserve lowered interest rates by 0.25%. In addition, this was explained by the Fed as a mid-cycle adjustment, rather than as the start of a cycle of reducing rates further. Many in the financial markets and Trump were expecting more talk of future cuts and this had a negative impact on the markets.
In his speech explaining the rate cut, Jerome Powell (Head of the Federal Reserve) referred a number of times to the risks from the trade war.
Shortly after this Trump (who has previously stated his desire for lower interest rates) escalated the trade war by announcing more tariffs.
China asked its buyers to halt imports of US Agriculture products.
China then lowered the value of its currency. This is seen as one of the main tools that China can use. They have since retreated their position a little, so maybe it was a warning sign.
Sharemarkets fell significantly in response to this and we saw the US markets fall 2.90% in one day. This was partially recovered the next day.
What is ahead?
Trump has recently proposed more tariffs to apply next month. These are aimed at consumer goods, which means they will have a bigger impact and reduce economic growth by a greater amount. China still has options that it can use to respond. Unfortunately, the period ahead is more uncertain and volatile as both sides scale-up their strategy. This means that falls like we have seen should be expected in the period ahead and until the trade war is resolved.
What should you do?
I understand that this may be stressful for some of you. Some points to keep in mind are;
Accept that share markets cannot continue to rise indefinitely. Falls are normal and healthy for the markets.
Keep in mind that the media headlines will always focus more on falls than rises.
Remember that even though share prices fall, the dividends are usually maintained.
Recognise that alternatives such as Term Deposits and Bank accounts are poor investment options at the moment and are best used as a cash reserve, as temporary holdings or for a specific purpose.
Don't check your portfolio balances too regularly. This can be detrimental as selling at low points has been proven to reduce wealth.
Take some comfort from the knowledge that you are not 100% invested in shares (I can say that about all of my clients) so you are not fully impacted by any falls.
Remember that share markets don’t move in an even manner nor at a steady pace. Emotions mean that the moves are usually sudden.
Know that despite considerable effort and resources, no-one has proven their ability to consistently predict short term (days, weeks, months or even a year) movements in financial markets, so you shouldn't try to do so.
Sometimes we feel the need to take action when not acting is the better decision. At this stage, there are reasons to be patient and not overreact.