Whatever the President might tweet, it is not the Federal Reserve’s job to throw investors a bone. Markets were hoping for one last night but, quite rightly, Fed chair Jay Powell pointed out that his remit covers inflation and financial stability, not Wall Street.
The reaction of the S&P 500 to yesterday’s quarter point interest rate hike (and the promise of more to come in 2019) was the worst since 1994 when the Fed last disappointed investors in a big way.
Having been up by 1.5% ahead of the rate decision and Mr Powell’s press conference, the S&P 500 closed 1.5% lower - a big intra-day swing. Markets in Asia and then Europe this morning picked up on the risk averse tone, adding to the negative sentiment that has dominated the final quarter of the year.
With worries about global growth mounting and financial markets in retreat, expectations had risen in recent days that the Fed would temper this week’s rate hike by pointing to a more cautious approach next year. But Mr Powell confirmed that the central bank remains on course to withdraw stimulus.
The Fed has raised rates nine times since it started tightening policy in 2015 and in November Mr Powell seemed to hint that the rate-hiking cycle was closer to ending than previously expected. Yesterday, however, the Fed confirmed that it believes rates will rise another two times in 2019 and perhaps once more in 2020. That remains faster than the market hoped.
In both the UK and Europe, markets are back where they were at the beginning of 2017, wiping out all the hard-won gains of the past two years. Japan’s Topix index has lost almost 400 points since its January peak above 1,900 and is now in bear-market territory - usually referred to as a peak to trough fall of at least 20%. The S&P 500 is on track for its worst calendar year performance since 2008.
It is not hard to see why the Federal Reserve wants to stick to its guns. With talk of an economic slowdown (and perhaps a full-blown recession in 2020), the central bank wants to ensure it has some ammunition to tackle the downturn when it does arrive.
If it has been able to push interest rates from their current range of 2.25% to 2.5% to above 3% by the time that happens, it will have some leeway to cut rates and boost the economy when it needs to.
Other countries, like Britain and Japan, which have not been able to raise interest rates in any meaningful way will have less ability to respond when businesses and individuals need their help.
So, Mr Powell has played Scrooge this year and ensured that the traditional Santa rally (rising markets in the run up to Christmas) has been notable for its absence in 2018. What should we make of the recent falls?
The good news for investors is that quite a lot of bad economic news has now been priced in. When Goldman Sachs wrote its 2019 Outlook in November, it set out three scenarios for the S&P 500 index next year. The most pessimistic of these saw the US benchmark index falling to 2,500. It has already done that.
Closer to home, the FTSE 100 index now yields nearly 5%, with many blue-chip shares offering investors an even higher income. History suggests that longer-term investors (putting money to work for three to five years, say) do well by investing when markets are this out of favour.
What this positive longer-term view does not mean, of course, is that the shorter-term experience will be easy. Markets are having to get used to a significant change in the investing environment. After years of support from central banks, there will be less help going forward.
Bear markets creep up on us. It doesn’t take too many one and two percentage point falls in the index for a 10% correction to turn into a 20% bear market. In less than three months since the beginning of October, we have gone from nodding approvingly at the markets grinding higher to worrying whether we are on the brink of something even uglier than the last few weeks has served up.
This is precisely the time when investors need to keep their nerve. It is human nature to want to flee the market after a succession of painful falls but that is invariably the worst possible response because the biggest rises in prices tend to follow the biggest falls. Missing out on even a handful of these big gains can seriously undermine your long-term investment returns.
At times like these, when the outlook is so uncertain, a balanced approach makes sense. Although share prices have been weak in recent weeks, government bonds have performed much better as investors have been prepared to accept a lower income in exchange for their relative safety.
The Fidelity Select 50 Balanced Fund, as its name suggests, holds a broad spread of investments, including both bonds and shares from around the world. The 10 months since the fund launched have been a challenging environment for manager Ayesha Akbar. But her cautious approach has done a good job of largely preserving investors’ capital and it looks appealing in today’s uncertain world.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Select 50 is not a personal recommendation to buy or sell a fund. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.