Ignore the chatter; take the long-term view

Key points

Equity markets have re-traced and become more volatile over the second half of 2018.

1. Tighter monetary policy has sapped liquidity
2. Lower liquidity has contributed to higher volatility
3. Investors have become more bearish

History reminds us that those investors who take a long-term view and invest when equity markets become overly negative are generally well-rewarded when overall market risk tolerance stabilises.

Why have equity markets become more volatile in the last half of 2018?

Equity markets have fallen in the second half of 2018, moving on from the previous three years of abnormally low volatility when global quantitative easing flooded the capital markets with low-cost capital. They are now exhibiting higher volatility (ups and downs) and have, on average, been trending lower.

Why have equity markets pulled back?

We would point to three factors – tighter monetary policy, lower earnings growth and a pull-back in “animal spirits” in part reflecting policy uncertainty.