While markets have been kind to us in recent years, it is important to recognise the context of the investment environment. With a decade of relatively strong returns since the Global Financial Crisis (GFC), and an exceptionally strong 2019 now behind us, we do not expect future returns to match what we have seen in the recent past.
The beginning of 2020 has shown once again that shorter-term market movements are impossible to predict. Over the longer-term shares are expected to outperform less risky investment such as bonds and we continue to expect this to be the case, but the total returns from both asset classes are expected to be lower in the future. All investors should be keeping this in mind as we enter 2020.
The new year has officially arrived and, while most of the country has been taking a well-earned break, global markets certainly haven’t. Military, trade, health, and economic events have seen global markets kick off 2020 in volatile fashion, ultimately leaving them in pretty much the same place they finished 2019.
So, what did you miss?
“World War III” started trending.
In early January, global headlines were dominated by the US drone-strike on Iranian military leader Qasem Soleimani. The price of oil shot up, while share markets did the opposite. The response – rockets from Iran at US bases in Iraq – sparked more market ups and downs as investors tried to weigh up the likelihood – and consequences – of more conflict, and what that might mean.
In the resulting confusion, it emerged that the Iranian military accidentally shot down a civilian flight leaving Tehran. With some hindsight, it appears that this tragic event may have the most lasting impact, as protesters around Iran gather to demonstrate against their government.
The U.S. and China started getting along.
In trade, early details of the first part of a possible deal between the United States and China have provided a welcome break from bad news. While far from a resolution, having some parts of a deal actually signed has at least allowed investors to gain some certainty whether further tariffs will be imposed. However, the next part of the negotiations will be more important and also more difficult. For the moment, markets seemed happy with what had been completed, with US shares rallying to new record highs through mid-month.
Retail started looking up.
US economic data has also given global markets some much-needed encouragement. Retail sales increased 5.8% year-on-year in December, indicating the American consumer remains in good shape. Weekly jobless claims unexpectedly fell in the first full week of January, too. That made for the 5th successive weekly fall, hinting at a positive trend.
Coronavirus – possible impacts.
The outbreak of coronavirus has been of concern in recent weeks. The quarantine of the Chinese city of Wuhan and reports of cases in multiple cities around the world have deflated share markets as investors try to understand the possible implications. Some assets, such as the oil market, have seen significant falls and on the other hand safer assets such as bonds have seen strong investor demand.
Quick out of the blocks, then a stumble
So far in 2020, news impacting the markets has been decidedly mixed. Military action is never welcome, the trade war is far from over, and the impact of the coronavirus remains uncertain. The year has already seen record highs in many markets, followed by quick falls, and now new highs in recent days. The result is major markets sitting a little higher than the level they finished last year: the US share market (S&P500) for example up 4.4% for the year at the time of writing, despite having endured a fall of about 2.6% towards the end January. Consider it a timely reminder that when your investing horizon is long-term, sometimes the best thing to do when volatility strikes is to play it cool and do nothing.
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