Imminent Market Downturn – Or Pessimistic Banter?

18 Apr
Many well-respected fund managers, investment strategists and economists have viewed their opinion over the market, so it’s clear – the market is about to see the best bull run of the 21st century or suffer a 20% correction in equities.
So who to believe?
Do we go with pundits, such as, BlackRock’s Bob Doll (Chief Equity Strategist)
who feels that the cautious sentiment already priced into the markets will prevent a 2011-style collapse and says the pessimistic argument is overblown?
Or, should we look to economists and strategists, such as, Marc Faber who predicted the stock market crash of October 1987 – he’s expecting a 2011-style collapse.
Okay, I accept the argument that the situation in 2011 was different :- 
  • optimism was higher with stocks coming off an impressive first quarter
  • oil prices were rising
  • the earthquake in Japan
  • the politically infused US debt ceiling fiasco

These all help fuel a sharp turnaround in risk assets as investors panicked and sold in volume.

2012 so far :-
  • stocks have been following a similar pattern in the first quarter of the year
  • oil, fuel and general commodity prices are a concern


6 Month FTSE 100 Chart


The question is – has the markets priced for relatively modest levels of growth, leaving less room for downside disappointments? If this is the case then the downside risk will be lower.

Looking at the recent levels of volatility it is clear that fundamentals only make up part of the argument – sentiment could well be a major influence.

Personally, I think either scenario is plausible so how best to build a portfolio?
1. We could use the gung-ho approach of everything in and it’ll work itself out and anyway stocks always rise over time! Simple answer – no. The highest most stock markets reached was in 1999 and the cycle has led up and down since then but don’t forget the benefit of dividends, assuming they’re re-invested.
2. We could hold only cash – no market risk to capital but what happens to the spending power of your money if you receive interest net of tax lower than inflation – another effective way to erode real capital let alone if you spend the interest.
3. Combine assets – I have taken a balanced structure between equities, fixed interest, absolute return funds, appropriate investment trusts and alternative investments.
The third strategy is the one I choose. I think it is fair to say it is very unclear what the markets hold for 2012 – for example in March the FTSE 100 reached 5,965 and in April fell below 5,595, a fall of 6.2%.
The idea being in the downturn the portfolio remains stable and in positive markets we make profits. This is achieved through careful portfolio construction blending assets with differing correlations to help neutralise the market confusion. Let’s just say I sleep soundly at night and so do my clients.
Contact me on my contact details above – email, twitter welshmoneywiz, linkedin Darren Nathan
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