It is useful to read last month’s Commentary as not a lot has changed from a fundamental sense. Sure there’s been the usual daily noise, with fits and bursts of volatility here and there but we have seen a few times in these past weeks where daily swings of +1% and -1% or more are not uncommon.
It can certainly present a problem for day traders and speculators but Solace Financial clients tend to take a long-term view for the part of their portfolio that is exposed to growth assets like shares and accordingly, as one portfolio manager noted a couple of weeks ago, “as investors we should be neither worried nor interested in what market indices are doing”. His point was that capital values will always move up or down on a day-to-day basis, so if we’re holding good companies for the long-term and earning dividends along the way then the daily movements of share market indices should not particularly concern us. This is especially so when some of those indices can be so dramatically moved by the performance on a given day of just one sector such as the banks in Australia or tech stocks in the US.
For the record though, the US Dow still sits around where it was after February’s volatility – which is where it was at the beginning of December 2017 which at that point was the highest it had ever been. Quite remarkably, 2017 saw the Dow Jones index record positive performance in each of the 12 consecutive months which is the first time this has happened in its almost 100 year history. So some sort of cool down possibly shouldn’t come as a surprise? Sometimes it seems the markets are just looking for an excuse to sell off…… the threat of a trade war, for example.
Our local ASX200 has bounced around between 5700 and 6000 for the past couple of months as well, while in Europe the UK and German markets have moved around their current ranges (UK 3800-4100, Germany 12000-13000) for about a year.
Once again though, we can report with some comfort that the prevailing view among analysts remains one of optimism. During March we sat down at different times with portfolio managers from PM Capital, Fidelity Investments, Macquarie, PIMCO, and Investors Mutual (IML) and noted fairly consistent positivity based on this theme of synchronised global economic strengthening (see Chart). There are always concerns too, and these were also fairly consistent: geopolitical instability, an environment where inevitable interest rate rises will cause short-term volatility, and specific topical concerns such as potential fallout from the US tariff proposal.
IML’s chief, Anton Taglieferro, went a little further explaining some of the causes of extreme volatility under the heading The Daily Information Flow. He noted that:
– More than 50% of daily trade volumes are now computer-generated, primarily via index funds, ETFs and the like. This over-computerisation creates volatility with no ‘active’ deliberation or discretion in stock buying and selling and he reckons this creates great opportunity for active investors such as IML.
– With the constant flow of information these days there is a real “upgrade/downgrade mania” where one short-term opinion from a research house or broker can cause an automatic response that potentially can shift markets, especially in concentrated ones like Australia’s. His point was that if we are long-term investors buying a company’s stock with a view to 10 or more years of future cash flows why should one downgrade change our view?
Patience and discipline remain key.
Chart: Purchasing Managers’ Index (PMI) is a widely used global indicator of the economic health of the manufacturing sector. It is based on: New orders; Inventory levels; Production; Supplier deliveries; employment environment. A reading of +50 indicates expansion compared to the prior month.
Sources: RBA, AdviserVoice, Bloomberg, Investors Mutual, PM Capital, PIMCO, Fidelity, Macquarie.