Market Volatility in Context

After the preceding weeks of heightened volatility on concerns of the spread of the Coronavirus, markets were sent into panic at the open on Monday morning as Saudi Arabia and Russia sent the global oil market into a tailspin. Equity markets and risk assets saw sell-offs and drops not seen in a single trading day since the height of panic preceding the Global Financial Crisis of 2007-2009!
And while equity markets across the world saw slight relief on Tuesday with positive returns creeping in, the scare of Monday will remain top of mind for many for a while to come.

Volatility is nothing new – it is a permanent feature of markets. But the higher-than-normal levels we saw now are certainly unnerving. We would like to stress that we have remained cautiously and defensively positioned across all of the Octagon portfolios, both local and global. Expanding on this, we have been holding above-average positions in cash and non-risk assets – instruments that would not have experienced price changes as markets fell. In addition to this, many of the equity positions in which we are invested, are in companies whose lines of business and profits are not cyclical, and therefore not heavily-dependent on the prevailing economic conditions – the cash flows of companies like this tend to remain robust regardless of the changing economic environment.

As mentioned in previous emails, the market will be looking for “support” as it tries to find its bottom, before seeing the eventual recovery. And while weeks like this bring the inevitable fear-factor to the fore, and the doomsday consideration that markets may go on downwards forever, it is important to focus on the fundamentals, and assess what lessons can be learnt from other, similar times in history.

The chart below shows a 25-year history of the S&P 500, and two facts stare one in the face:

• The market is exceedingly more positive than it is negative (21 positive calendar years versus only 4 negative), and
• 21 out of the 25 years saw a market correction of -7% or greater! (And only 4 of these years saw the total return of the year below 0%)

Volatility, and its commensurate swings and fluctuations are an inevitable part of an investor’s lexicon. The trick is always to know when to shut out the noise, and focus on the fundamentals. When asset prices grow at an exceedingly unsustainable pace, (like what we saw in the Tech Bubble of the early 2000’s, or Bitcoin in late 2017) we often remind our investors not to get drawn into the furore and euphoria of the “This time it’s different” club – every time someone has said this, it’s turned out to be no different to the past. And while the severity of the Covid-19 virus remain as-yet unknown, should we not be reminding ourselves that we’ve been in similar instances before and that this time it’s more likely to be no different too?