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Cutting through market noise

Investment success depends on many factors. One of them is knowing which markets narratives to track because ultimately markets are moved by the shift in balance between buyers and sellers. The changes in understanding that cause investors to act are a key to market direction. It’s important that investors identify the most influential market stories.

A case in point is the current freeze on government spending in the USA. While the US government shutdown is potential political dynamite, and generates lurid headlines, the global economic impact is far less significant. The shutdown means that a lot of spending is deferred, but not destroyed. There are parallels when a gold mining company experiences operational delays. The value of the gold in the ground doesn’t change, but the income from selling that gold is delayed. This is a negative, but generally a minor one.

If the impasse drags on for months, the situation may change. The risk for markets is more indirect, in that it may affect sentiment. Nonetheless, most professional investors are largely unconcerned.

Global growth, and in particular the growth outlook in Europe, China and the US remains at the heart of market performance. The argument is now about the outlook for 2020, with some suggesting a tanking US economy will drag the world into another recession, given a slowing China economy and a moribund Europe. This is a factor in recent increases in volatility. Because the discussion is about events in the distant future, hard evidence is scant. Sentiment and positioning become more important in determining day to day market moves.

The events that speak to this narrative in the near future are the US/China trade talks, the coming earnings seasons, and Brexit.

However market responses to improving or diminishing growth prospects are complicated by the interplay with interest rates in a good news/bad news dynamic. A stronger GDP release may see investor buying, favouring growth exposed sectors such as energy and technology. On the other hand the stronger growth expectations can induce fear of higher interest rates, prompting selling concentrated on yield sensitive sectors like property and infrastructure. One important consideration in anticipating market reactions is understanding investor thinking in the lead up to news that may move the market.

The recent recovery in oil and base metals prices suggest markets have moved back from the economic doom scenario that dominated the last quarter of 2018. However share markets remain at more defensive levels. This could see a stronger reaction to positive developments.

If China and the US reach broad agreement the outlook for global growth brightens considerably. A “melt up” can’t be ruled out. This is why investors need a long term plan that will save them from liquidating portfolios at market lows.

The other central market question revolves around company earnings. In the US two quarters in 2018 produced overall earnings growth at 20% plus. It is unlikely that this extraordinarily high growth will continue in the reporting season that kicks off this week. However it is also unlikely that earnings will fall, arguably priced in at the lows hit in December. Once again, it is possible there is greater risk of sharp upward movement than there is of further falls.

Market sell downs damage investor conviction as well as portfolio values. While no-one knows the future, adhering to better investment practices delivers value over the market cycle. Panicking at or near the bottom of a sell down is an understandable but wealth destroying move. Sometimes investment success is a matter of having the nerve to stick to a plan.

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