Markets Tumble as recession fears grow

Posted by Adrian Lowcock in Market commentaries category on 03 Oct 19

On Wednesday, the FTSE 100 fell 3.2% following the announcement of weak US manufacturing data on Tuesday evening. The data came as a bit of a shock as many investors had become more hopeful on news the US would restart trade negotiations with China and Central Banks had been quick to act to address broader economic concerns.

The ISM U.S. manufacturing purchasing managers’ index came in at 47.8% in September, the lowest since June 2009 and for the second month in a row it indicated a contraction (a figure below 50 shows the sector is shrinking not growing).

Recession fears are back at the forefront of investors’ minds as the global economy has been slowing down since the summer as the US trade war with China affected all countries. On top of this, the geopolitical landscape is unclear. A possible impeachment of Donald Trump, fears of a no deal Brexit and rising tensions with Iran in the Middle East all mean investor sentiment is weak.

Whilst the indicators clearly show an economic slowdown is happening it may be too early to assume a recession is a certainty. The US consumer, which accounts for about 70% of US economic activity, remains strong. The US Federal Reserve has already begun to reverse the interest rate rises, one of the biggest factors affecting the US economy, and having cut interest rates twice this year it looks set to do so a third time at the end of the month. The European Central Bank has also slashed interest rates even further into negative territory and restarted its Quantitative Easing programme. This all takes time to feed into the economic data and as such, the outlook could remain negative for a while longer, assuming the Central Banks have done enough.

What should you do?

Trying to predict market movements in the short term is a high-risk strategy as it is impossible to know whether stocks markets will fall further and what the bottom may be. October has a reputation for being a volatile month and seems to have delivered on its reputation already on its first week. In volatile and falling markets, it is important to revisit some basics:

1) Remind yourself why you are invested and what your goal is. Investing is for the longer term - at least 5 years.

2) Make sure you are diversified. Having exposure to different assets means that when some are falling in value, others may be rising thereby reducing the volatility of your portfolio. Capital preservation is an important aspect of investing. Gold and absolute return funds are examples of assets that tend to perform when equities do not, although this is not guaranteed.

3) Equities have tended to rise in the longer term - history shows that stock markets have tended to rise and recover from sell-offs although it is important to remember the past is not a guide to the future.

4) Review your existing investments - are they doing what you expect to do and are they suitable for you?

Finally, the most important thing to remember is do not panic. Markets rise and fall all the time and there are periods of when the market is more volatile. In such times, it is more important than ever to focus on the fundamentals and ignore short-term price swings.