Volatility is back. Following its worst weekly performance since January 2016, the S&P 500 gained 2.7% on Monday, its biggest one-day gain since August 2015. The index has moved by more than 1% in either direction on 19 days since the end of January, the same number of occasions as in the entire 17 months prior.
Faced with renewed choppiness driven by trade-war fears, investors might be tempted to withdraw from risk assets. But we recommend that investors:
- Stay invested while global growth and corporate earnings fundamentals remain supportive of further equity gains. An early exit can have a high opportunity cost. Since 1992, missing just the top 10 trading days in the S&P 500 would have reduced cumulative total returns by 37%.
- Consider downside protection and countercyclical positioning to protect against tail risks. Within our portfolios we hold positions, such as our overweight in US Treasuries and our preference for the Japanese yen over the New Zealand dollar, which can perform well in both our base case and in case of a market downturn.
- Maintain perspective. Initial market reaction, swayed by tough rhetoric, may be exaggerated. To date the Trump administration has proposed potential 25% tariffs on up to USD 60bn of Chinese imports, yet last week the S&P 500’s market capitalization declined by USD 1.4trn. Tough talk has been a precursor to negotiation, suggesting positive trade outcomes are also possible.
So while we believe it is prudent to manage against downside risks and are monitoring the potential for escalation, we maintain a risk-on stance and are overweight global equities. For more thoughts on trade click below for an interview with our Chief Investment Office for Ultra High Net Worth.