Stock Market correction – is it a reason to panic or a great opportunity?

Posted on 7 February 2018

It is important to note that the market correction in equity markets which has taken place over the last few days has only taken them back to roughly where they began last year. The performance has been unusually smooth for longer than usual and was always unlikely to last. As an example the US stock market saw 15 consecutive monthly increases from late 2016, the last time this had happened was in the 1950’s.

What we are witnessing is most likely a short term rush out of risk assets into cash as a reaction to the fairly rapid increase in global bond yields over the last couple of months. This rise in yields has been well within market expectations, but the speed of the move combined with some higher inflation readings has driven profit taking in equities. The speed of the drop in share prices may also be fuelled by forced selling, especially among investors who have been wrongly positioned in leveraged short-volatility products. The question now is where and when the market correction stops?

Many of the leading market analysts have a positive view on global economic activity for 2018. In particular, they believe investors should be reassured in coming days and weeks by the strength of company profits, and the dividends and share buybacks which high levels of company cash allow.

US earnings are particularly strong, with expectations for tax cuts boosting estimates for this year. Inflation is likely to edge higher in coming months, but we do not expect it to surge dramatically as structural headwinds remain significant. Central banks are therefore unlikely to be aggressive when tightening policy.

If as investors we are able to grow comfortable with this outlook then that should be enough to stem the sell-off and trigger a recovery. The worst thing that anyone can do now is make knee-jerk decisions.

Past history would suggest buying opportunities are appearing; previously over-bought conditions have now reversed, and valuations look more attractive. However, future gains in markets may be rather more measured, as confidence takes time to re-build.

If you are concerned or wish to discuss further, please contact your Vue Financial Adviser  on  02 8856 0966.

“Aberdeen Standard Investments” 7^th Feb 2018