The Multi-Asset Process

February 2018 market review

Regular readers of these updates will be aware we have long talked about our surprise not to see a moderate correction in markets, so the events of early February actually came as something of a relief. Having been expecting a pullback for so long, we were keen to get it over and done with and focus on more fundamental factors.

The fact the declines commanded News at Ten time indicates how complacent markets had become: equities had enjoyed their best start to a year since 1987, buoyed by President Trump’s tax cuts, and the previous 12 months had seen a series of all-time highs in indices around the globe.

Commenting at the time of the correction, we echoed our long-held view that this was long expected, is unlikely to mark the start of a recession and should present opportunities for patient investors.

Context can also be all-important in the midst of escalating panic: newspapers were able to spring on to the fact that the 1000-point plus falls in the Dow Jones Industrial Average on 5 and 8 August were the largest in decades. In percentage terms, however, the falls equated to 4.6% and 4.2% and are dwarfed by the 22.6% drop on Black Monday (19 October 1987).  

Fear of inflation seemed the most obvious factor behind the correction, with the fear of missing out that has driven markets over recent years temporarily giving way. Following a quick recovery after the falls, equities dropped again at the end of February and registered the worst month for the asset class in two years.

In our portfolios, we took some profits in Japan in December and also tilted towards value stocks. Japan has been hit hard and, if we see further corrections in the months ahead, growth stocks would be expected to bear the brunt of any sell-offs so we will wait to see how things play out.

We want to reiterate that we have seen market pullbacks before and the vital lesson has always been to maintain investment discipline. Our style is naturally defensive and a winning by not losing strategy is built to withstand the natural ebbs and flows of markets.

One thing to monitor is whether this pullback is enough to shock markets out of the low-volatility environment that has prevailed in recent years. The so-called fear index – the Vix, which shows market volatility – saw a considerable spike in early February but fell back in the following weeks, albeit to a slightly higher level than in recent months. At 10 for much of 2017, the index rose to nearly 40 in early February and sat at around 20 as we entered March.

In other events during the month, the Federal Reserve released the minutes from its end of January meeting, which indicated the Bank believes the economy is ready for higher interest rates. While the Fed decided against raising rates, comments about robust economic growth suggest a hike is firmly on the cards for the next session in March. Officials have upgraded their economic outlook since the beginning of the year, listing three main reasons: the strength of recent economic data, accommodative financial conditions and the expected impact of the $1.5 trillion tax cut that took effect in January.

New Federal Reserve chair Jerome Powell also released his first semi-annual monetary policy outlook during the month, echoing his predecessor’s optimism on the economic outlook. He did state market volatility would not derail the tightening cycle, however, and we wait to see whether he falls on the dovish or hawkish side of the divide.

We are also watching the imminent Italian elections with interest (voters go to the polls in early March), with many warning the Eurosceptic views of three of the four main parties could threaten the European Union in the long term.

Political risk in Europe was a concern last year as several countries went through elections but although most showed signs of rising populism, Emmanuel Macron’s victory in France and then Angela Merkel winning a fourth term as Germany’s Chancellor calmed fears the EU could splinter. In Italy, four parties are in contention: the anti-establishment Five Star Movement, former Prime Minister Matteo Renzi’s Democratic Party, Silvio Berlusconi’s Forza Italia and the right wing Lega Nord – and the coming weeks will reveal what the result means for the great European experiment. Early signs point to a hung parliament, with voters once again favouring right wing and populist parties.


Of course, Brexit continues to dominate news in the UK, with unseemly jockeying for position among the Conservatives and Jeremy Corbyn’s stance – assuming we leave the EU next year – settling on the very definition of having your cake and eating it. While we are getting ever nearer to exit in 2019, there is little sign of any clarity of what this will look like in reality.


The events of the past month, both politically and in markets, have highlighted once again the importance and value of being a long-term patient investor.

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Tuesday, March 6, 2018, 12:05 PM