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Trade and Trump make for stormy markets

Ed Monk

Ed Monk - Fidelity Personal Investing

There’s a nervous mood to markets at the start of the week, with major markets continuing losses as investors begin to price in a slowdown in global growth.

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A series of bad headlines last week has prompted many to take profits ahead of what looks set to be an uncertain few months for major economies.

First was a 0.25 percentage point cut to US interest rates. That would normally help markets but many had been hoping for an even deeper cut, and were therefore left disappointed. In setting out the Fed’s action Chairman Jerome Powell chose his words carefully, describing the move as a ‘mid-cycle adjustment’. That was presumably an attempt to alleviate growing fears that we are now approaching the end of the cycle, with a slowdown likely to follow shortly after.

Then, on Thursday, President Donald Trump tweeted that he would apply 10% trade tariffs on a further $300bn of Chinese exports entering the US from September 1st. There is already evidence of a slowdown in the US and Chinese economies, with predictions that the tariffs will have a bigger impact on growth as time goes on.

Then there is the risk of an economic shock in Europe thanks to a No Deal Brexit.

The result was a sharp fall in US and Asian shares, while the FTSE 100 suffered its worst day of the year on Friday and has lost more ground today, falling 1.8% this morning.

It’s unlikely to be the last of the volatility. Economic news from the US is likely to continue to be mixed in the weeks ahead and another Fed decision in September will test markets again. Trade talks also resume that month and the President is likely to talk a tough game as they approach, while Brexit uncertainty will not go away either.

Against that backdrop, lots of investors will be eying the sell button. Before they hit it, however, they should ask themselves - ‘if I sell, when will I buy in again?’

There is unlikely to come a day when the issues currently stalking markets evaporate completely, so those hoping to sell down investments now will almost have to buy back in at a time when the outlook is still uncertain.

That’s the hard bit about trying to time markets. You don’t just need to get one call right, you need to get two. Selling out is the easy bit because you can do it and swim with the crowd at the same time. Buying back in, on the other hand, requires a contrarian approach that few, when it comes to it, are comfortable adopting.

Some will get it right but many won’t. The past year in markets is a good example of why attempts to time investments like this so often prove unsuccessful. Taking the FTSE 100 as our measure, prices suffered a sharp fall in the second half of 2018. Those who sold out before the worst losses hit in October 2018 would have been initially very pleased with their timing. The index fell around 12% between October and January.

But from that point onwards markets have bounced back strongly, creating a V-shape recovery. Prices this year have risen above the point of the big falls last October. Those who had hung on would have recovered any lost ground.

Five year performance

(%)
As at 2 Aug
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
FTSE 100 3.8 3.3 16.0 6.5 2.1

Past performance is not a reliable indicator of future returns

Source: FE from 2.8.14 to 2.8.19. Total returns in local currency.

Important information 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. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Investors should note that the views expressed may no longer be current and may have already been acted upon. 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.

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