Are the markets ready for a correction?
By Mark Boyes
Thursday the 19th October marked the 30th anniversary of Black Monday, a day during which the Dow Jones Index fell by 22.6% in just 24 hours. With the US and UK equity markets flirting around their all-time highest levels, there has been talk of on an imminent correction, due to the simple fact that it takes place every seven years or so.
This is like me saying there’s a major earthquake every seven years, when the reality is such an event could happen much more frequently than that and then not until a longer period of time afterwards. The markets need to be shocked by something or generally overheat to cause a dip also known as a correction, the former cannot be foreseen, and the latter is a long way off happening.
The truth is you must dig a little deeper and look at the macro-economic environment to see if the stock market highs are justified. We are currently experiencing the second longest bull market in history but, why can’t it be the longest or even the longest by some distance?
Below are some bullet points of facts and opinions from investment management professionals and fund managers I have met with recently which should clarify my point of view and, elaborate on the current stage of the economic cycle and why it is sustainable:
• The Vix index (volatility measure) is at an all-time low
• Major Governments are still printing money to stimulate the economy
• Governments have kept Interest rates extremely low to encourage people not to hold cash as an investment as inflation will erode its buying power
• Low interest rates mean companies can borrow money more cheaply and easily
• Companies are releasing figures showing record earnings
• Employment is almost classed as full in the UK and US
• Political risk has significantly reduced in Europe
• This economic cycle is sustainable as fundamental data from companies is still strong
• This is the first time in a long time that every major economy is doing well including most sectors
• Oil companies are now providing a tail wind to the global economy even though the price will struggle to break the 70 USD per barrel mark again.
Despite all the positivity there are still some areas investment managers are currently mindful of which are:
• Cash is far from king as it currently guarantees a loss against inflation
• Government bonds are expensive and in some cases, have negative yields
• The tightening of monetary policy in the US and UK
Feel free to reach out to Mark if you have any questions here –> https://www.linkedin.com/in/boyesmark/