Psychology of markets never ceases to amaze, when markets are on their relentless rise, everyone hopes for the correction that will give them an opportunity to buy in. The market keeps rising, the pain gets too great and the fear of missing out takes over, investors then chase the market and as we saw just at the peak ten days ago we get record inflows. The correction comes as the last buyer in town leaves the saloon, the market falls and last week, as the correction comes, Lipper Fund services announce record out flows from equities. These times, it’s easy to forget are the opportunities, the FTSE 100 is now lower than it was this time last year. The world is in better shape, according to most measures than it was a year ago, this should be the opportunity one has been looking for. Likewise, the broader Stoxx 300 is lower than it was a year ago, Europe’s economy is in a far healthier state. This should be a time of milk and honey. Corrections, as we repeat time after time, are fast and painful, knee-jerk reactions are often not wise.
Looking back at the past week, the Vix index reached 50 at one-point however finished the week closer to 30. US ten-year yields ended the week at 2.85%, close to recent highs but as yet not touched the magic 3%. The spread between the 2 and 10-year US Treasury is now at 0.85%. The FTSE 100 lost almost 5% in the past five days, the Stoxx 600 a similar amount. Despite a strong recovery towards the end of the day on Friday, the S&P 500 ended the week almost 6% lower. Commodity prices fell, the Reuters commodity index is now also lower than it was this time last year. The oil price has likewise given back about 10% of its recent gains.
The most oft-used phrase in financial journals, the equity markets are expensive. The US equity market is not cheap, but the FTSE 100, based on the Case Shiller cyclically adjusted price to earnings, looks inexpensive relative to history. According to the Wall Street Journal the S&P 500 is now trading just over a forward multiple of just over 16x price to earnings, now far closer to the historic average of 15x.
Looking to the week ahead, what news may look to calm investor nerves? For the US we get the latest inflation data on Wednesday, along with January retail sales. Core inflation is expected to remain at 1.8%, should that be the case it may well calm bond and equity markets. A sharper than expected rise could lead to more pain in both asset classes. We also get the latest inflation data for the UK economy on Tuesday. The forecast is for a drop back below 3%, a sharper fall than that may take some of the pressure off the Bank of England. As for the euro area the second estimate for 4th quarter 2017 GDP, which is expected to climb to 2.8%. Hang on to your hats it could remain volatile, but equities are better value for money than they were 7 days ago.