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Are the markets set to see greater volatility?

18 April 2018

Is there greater market volatility ahead? AJ Bell investment director Russ Mould believes there is.

Mould believes that investors have not yet seen anything in terms of volatility, if previous patterns are to be followed. The FTSE 100 has seen just 14 daily movements of more than 1% this year, compared to an average of 93 such movements per year over the past 20 years. Meanwhile, the S&P 500 has already racked up 27 daily movements of more than 1% in 2018, compared to an average of 75 such movements per year over the past 20 years.

“Despite talk of stock market volatility, the reality is that the FTSE 100 and S&P 500 indices are still behaving pretty calmly relative to the last 20 years, so investors may need to be prepared for wilder times ahead,” said Mould.

“Similar quiet periods to match the subdued stock market action of 2015-2017, such as 1994-1996 and 2004-2006, were followed by a real spike in volatility which ultimately heralded the market tops of 2000 and 2007. One lesson investors can therefore draw from history – were it to repeat himself – are that we haven’t seen anything yet in terms of volatility.”

Mould says investors can judge volatility by simply looking at how many times the FTSE 100 and S&P 500 indices have moved by more than 1% from open to close on any given day.

He notes that for the moment, the US appears more “jittery” than the UK, given the US stocks trade on much higher valuations than British ones after a marked period of outperformance so “hopes are higher, valuations are higher and the margin of safety lower should something go wrong.”

“Investors in British stocks are, for the moment at least, more sanguine, despite ongoing concerns over Brexit, the prospect of a more aggressive Bank of England and wider worries over what tariffs may mean for global trade and economic growth.

“This may be because a marked period of underperformance relative to other international markets means expectations are lower, valuations are lower and downside protection is thus greater, should something go wrong,” added Mould.

Mould said any further increase in volatility should be viewed as a gentle prompt to focus upon risk as well as reward, which could mean trimming positions in stocks with weak balance sheets and instead focus upon those with strong finances.

Mould concludes: “Volatility is not the enemy of the investor, as it can provide a chance to sell assets expensively and buy them cheaply, which explains why building up some cash can make sense. But it can be their enemy if the investor either loses their nerve or is forced by circumstances to sell at an inopportune time, when prices are falling, markets depressed and valuations more (not less) attractive.”

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