A perfect storm.

10th October 2014

Ian Copelin, Investment Director, my wealth comments “Just when we had got use to lower volatility, risk-on/risk-off has returned to the markets with vengeance.

Earlier this year we had a period when the S&P 500 Index went 62 consecutive days without more than a 1% move.  In the seven trading days so far this month, we have already had 5 days where the S&P 500 has posted a move of greater than 1%!

This volatility has been caused by a perfect storm, from:  the Ebola virus; geopolitics (predominately Hong Kong, Iraq, Syria); the ending of the Fed’s monthly bond buying programme (QE); the strength of the US dollar (which may slow US corporate earnings); this week’s IMF forecast that global growth is slowing; and Europe’s weak economy and deflationary threat.

The slow European growth and risk of deflation is nothing new.  But with signs that Germany’s economy is now on the verge of a recession, it just may be the catalyst needed for Mario Draghi, the President of the European Central Bank (ECB), to force through his own QE to ease deflationary concerns (Germany has to-date resisted European QE).

While the strength of the US dollar may lead to US corporate earnings growth being downgraded, it is likely to help ease the deflationary pressures in Europe and Japan, as it should increase their imports costs.  In addition, a stronger US dollar will be deflationary for the US economy, which will prevent inflation from going near to the Fed’s goal.

As for Ebola, we have one stock that is being negatively impacted:  Carnival Plc (which owns and operates cruise ships).  However, Peter Quayle, one of WEALTH at work’s Portfolio Managers, believes that the recent share price decline has been overdone as the company’s earnings shouldn’t be significantly affected, unless the epidemic or consumer sentiment gets a lot worse.

Whilst the current market volatility and the subsequent media headlines which are all feeding on themselves, can be unsettling, there is no need to panic and head for the exit.  I believe that the current sell-off will soon exhaust itself and draw in cash from the side-lines, as the flip-side of these negatives is that interest rates will stay low for even longer!”