Stock selloff: Fearful, not fundamental
Author: Kevin McCreadie
December 24, 2018
Stock markets are in turmoil heading into the New Year, but don’t blame it on a breakdown in fundamentals. Fear is the bigger culprit and it may take more selling before calm is eventually restored.
In recent weeks, investors have been on an emotional roller coaster as they grapple with the prospect of higher rates, trade tensions, political upheaval and a late-cycle economy. This has led to a new wave of volatility and a pattern of extreme trading, which has featured declines of greater than 1.5% multiple times this month, and could end up resulting in the worst December for U.S. equity market performance since 1931, according to Bloomberg data.
Not much has changed from a fundamental perspective during this recent bad stretch, however. Interest rates remain historically low – both on the short and long end; economic growth is still near 3% globally; inflation is in check at close to 2%; and earnings growth, while expected to slow, continues to run in the double digits. In fact, if you knew nothing else about the current climate, it would be difficult to fathom why markets are so fragile.
But that is exactly the type of impact that a turn in sentiment can have on asset prices. Despite sound fundamentals, investors have started to grow leery of the risks they face and seem less willing to ride out unresolved conflicts like the ongoing U.S. and China trade negotiations than was the case earlier this year.
At this stage in the bull market, the reward for embracing uncertainty is less compelling for many investors – especially for those who suffered big losses during the financial crisis of 2008 and/or tech wreck of the early 2000s. Moreover, with cash now finally providing some yield, there may be less incentive to stay fully invested in stocks than in the past.
All of this is understandable and may require more losses to clear out the sellers, reset valuations and re-establish some optimism. But the current environment feels far less terrifying than the backdrops that contributed to the two big global bear markets of this century. And while there is no doubt the global economy is nearing the end of its expansionary cycle, it remains healthy enough to support equity markets over the next few months.
Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd. He is a regular contributor to AGF Perspectives.
The commentaries contained herein are provided as a general source of information based on information available as of December 20, 2018 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
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Written by
Kevin McCreadie, CFA, MBA
CEO and Chief Investment Officer
AGF Management Limited
