It’s all in the mind

Fund Manager James Thomson explains why there is a finely balanced tug of war in equity markets at the moment.

This content is more than 6 months old now, please visit the news area of this site for more recent content

  1. James Thomson

There’s a tug of war going on in the market at the moment.

For most of 2018, investors felt pretty good about life in general and their investments in particular. But that mood turned pretty dramatically in the final quarter, with worried investors hauling the rope toward pessimism. However, that funk appears to be overdone. The collapse in investor sentiment drove the ninth-worst selloff in US market history – other episodes included five selloffs during the Great Depression, the 2008 great financial crisis, the 1987 crash, and the dark days after Pearl Harbour. Comparing the current environment to those horrors makes you question whether fear has outstripped reality.

Some US economic data has come off some pretty spectacular highs (others remain sky-high, I might add), but the information we look at is nowhere near recession territory. And that’s what is most important about stock markets: they go up, they go down, but they tend to stay down for prolonged periods only when GDP starts to shrink.

So we come to the other end of the rope: many analysts, investors and even the US Federal Reserve (Fed), believe the US economy is decelerating slightly, but remains in fine fettle – at least for now. Those who take this stance are the reason stock markets have staged a small recovery in early 2019. Whether this upward momentum continues or tails off and into another slump will depend on upcoming global economic information, semantics of Federal Reserve statements and the good/ill humour of investors.

We are cautiously confident that a strong US economy will help the global economy continue to grow for at least the coming year. However, the market mood is even harder to predict. People are erratic and irrational, which often flows through to markets, especially in the short term. The tug of war is finely balanced at the moment, so it won’t take much to spark a sharp move up or down.

Many investors clearly believe that downside risks are rising and they are punishing companies that are most dependent on strong economic growth. Investors are hypersensitive to any signs of economic deceleration, but doing so earlier than ever to avoid the complacency that defined the pre-Lehman years. The economy is slowing, but everyone is assuming it will have the same devastating effect as 2008, which we believe won’t happen. Risks are clearly increasing because at the beginning of 2018 every country’s Purchasing Manager Index (a measure of business optimism and output) was at an expansionary level. Now eight countries are flashing recession warnings. The stock market is unlikely to stabilise until these key pieces of economic data stabilise. But amid the consensus gloom of investors and businesses, there are upside scenarios in the near future. The Fed has signalled a change in the pace of its rate-hiking, a truce in the US-China trade war could be brokered or economic data could tick upwards from its recent downtrend.

The speed of last year’s change from outright optimism to soul-crushing despair was surprising – it seemed to exaggerate and extrapolate many timelines, indicators and waypoints that have historically been helpful guides for investors. But perhaps this is a symptom of a today’s market, where information flows so quickly that everyone knows about the tell-tale signs of impending doom and jumps the gun. 

The current sell-off is a good example of behavioural psychology: how fear creates an urgency and a pain that is much stronger than the pleasure of any equivalent investment success.  The conclusion for many investors was to ‘give up’ on equities, but in fact, if you have a long-term investment horizon, that should be the only thing you never do.

James Thomson is Fund Manager of the Rathbone Global Opportunities Fund.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

More from author

  1. James Thomson

    It’s all in the mind

    Fund Manager View - 5th Feb 2019 10:45am

    Fund Manager James Thomson explains why there is a finely balanced tug of war in equi...

Most read articles

  1. It’s all in the mind

    Modi’s emphatic victory

    Fund Manager View - 5th Feb 2019 10:45am

    Ewan Thompson, manager of Neptune India Fund, discusses what the outcome of India's r...

  2. It’s all in the mind

    Reforming Brasilia

    Fund Manager View - 5th Feb 2019 10:45am

    Thomas Smith, manager of the Neptune Latin America Fund, discusses the current prospe...

  3. It’s all in the mind

    Modi: not out?

    Fund Manager View - 5th Feb 2019 10:45am

    Ewan Thompson, manager of Neptune India Fund, comments on the recent volatility in th...

Investment involves risk. You may get back less than invested.