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Over the last few years, it feels as though we have experienced a few “once in a lifetime” events which have caused significant market volatility across the globe. Like many other investors over the past few days, you will have seen the world media reporting on “Tariff Turmoil” and “Panic Monday”.
As we have seen before, with any financial event, stock markets can be significantly influenced by emotion and sentiment and after the announcement of US tariffs on the 2nd of April, they have proved this once more. Markets in Asia were hit again overnight followed by further falls in the FTSE this morning and then the inevitable drops in the US market.
Unlike the early days of the 2020 COVID pandemic or the 2008 Global Financial Crisis, this downturn has not been triggered by fears in the underlying economy but instead, in the most part, by Trumps tariff policy. As this most recent market volatility can be attributed to policy making, it does also suggest a change or softening in policy can have the opposite effect. Whilst based on past behaviours it seems unlikely that Trump will back down on his own volition, we may well see other countries making concessions allowing for a de-escalation. What we do know is the longer the trade war continues and the more it intensifies, the more it will damage business and investor confidence which could cause more medium and long term damage – certainly not part of the Republican manifesto.
In times like this, it is normal to feel concerned or anxious. Indeed, ‘loss aversion theory’ suggests that we feel the pain of losses far more intensely than we feel the pleasure of gains and often our initial reaction is to “cut and run”. By acting on this impulse, we could be severely hindering long-term potential growth. The adage, “time in the market, not timing the market” is particularly prominent when downturns like this arise. By selling out of equities when the market falls, investors run the risk of missing out on any recovery that follows.
Looking to the past for some guidance, the best and worst trading days often occur close together during times of uncertainty in markets. It has been shown that investors who sell their investment and switch to cash during downturns typically underperform in the long-term compared to those who remain invested due to this very fact.
Vanguard, the world’s second largest asset manager, has put together the enclosed document which can hopefully offer some comfort that these negative periods do not last forever.
The focus for us all during this time is having the confidence to stay invested to absorb the volatility and participate in the market recovery. When that will be and how much more volatility we observe in the meantime is the million dollar question.
To summarise, it is important to remember that to obtain longer-term gains, we must accept the shorter-term volatility and remain disciplined in volatile times such as this.
If you have any queries or concerns, please do not hesitate to contact your financial adviser.
