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Investor Education > Market Commentary

17 December 2017

The Return of Volatility

By Marcus Tuck, Head of Equities - Mason Stevens Ltd

The aging bull market showed its age in 2018. A correction came in February and, following a rally to a new high, another correction started in October that erased the gains for the year.

 Volatility clearly returned to financial markets after being abnormally low in 2017. This can be seen in the chart below comparing the VIX Volatility Index to the US S&P 500 Index.


 Despite relatively buoyant GDP growth and company profits, particularly in the US, equity markets were beset by a series of headwinds. They included the US Federal Reserve raising interest rates and withdrawing quantitative easing, a US-initiated trade war with China, rising credit spreads, ongoing Brexit turmoil, and Italy's budget conflict with the EU.

 Emerging Markets sold off through the year and the popular US technology "FAANG" stocks - Facebook, Apple, Amazon, Netflix, Google (Alphabet) - came under pressure late in the year.

 Economic growth will be slower next year but a recession seems unlikely at this stage. The market PE ratio has derated through the correction and earnings growth expectations are back to more reasonable levels. For example, the 12-month forward PE ratio for the US S&P 500 Index is around 15x, close to its 10-year average, and earnings per share growth expectations for 2019 are single-digit. 

Inflation and unemployment are low and real short-term interest rates in the US are around zero, which is not particularly restrictive. However, debt levels are high and the end of quantitative easing puts markets in uncharted territory.

 The Australian share market has had its own challenges with the Banking Royal Commission putting pressure on the banks - the largest sector of our market. With the Australian housing market already weakening, the RBA will be in no hurry to raise interest rates here.

 Although conditions remain challenging, sentiment could improve on a successful trade deal or signs that the Fed is becoming less aggressive on interest rate rises. However, volatility is likely to continue.

 It is worth remembering some words of investment wisdom from one the world's great investors, the late Sir John Templeton who was famous for being a successful contrarian value investor.

 Among his 16 Rules for Investment Success are, "When buying stocks, search for bargains among quality stocks" (our underlining), and "Buy value, not market trends or the economic outlook."

 The last of his 16 rules was the warning, "Do not be fearful or negative too often." "To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward." His advice is simple, but not easy to implement.

 In an interview with Forbes in 1988 Sir John said, "People are always asking me where the outlook is good, but that's the wrong question. The right question is, 'Where is the outlook most miserable?'"

 To give the last word to Sir John, "Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria."

If you would like to learn more about Sir John's 16 rules refer to:


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