Nick Gait – Market Update

Markets have calmed significantly since our last market update with major global indices recovering close to all-time highs. Despite the size and speed of the moves, those on their summer break can be excused for barely noticing. The MSCI All Countries World Index (ACWI) was down 5.75% in GBP terms between the 31^{st of} July and 5^th August only to recover to within a couple of percent for all-time highs as of the time of writing. Similarly, the VIX index, a popular measure of the stock market’s expectation of volatility, reached its highest level since 2020 and slightly higher than during peak volatility seen in 2022.

Although we are certainly not advocating that you disengage from your long-term investment plan or that you ignore our bi-weekly communications, not monitoring daily moves can sometimes prove to be beneficial. After all, most investment time horizons are a lot longer than just days or weeks. Markets rarely produce linear returns with volatility an unavoidable part of investing. Even in the years where portfolio returns are excellent, an investor normally must go through periods in between which are less than comfortable, as we saw multiple times in 2023.

The pace of the recovery, after the markets most recent bout of volatility, continues to highlight any attempt to time markets is not possible to do on a consistent basis and can lead to even more difficult decisions further down the line. One of our favourite pieces of research which has been produced by Fidelity, ‘When doing nothing is best’ which makes clear the downside of attempting to time the market, especially in situations like we have seen where headlines are overwhelmingly negative and market participants are fearful. Missing just a few of the market’s best days can significantly reduce returns over periods as long as fifteen years.

Rather than timing the market, Tideway will continue to remain fully invested in times of market volatility, as we have done historically, relying on portfolio diversification; assets which exhibit strong performance at different times to see us through tougher periods with positions such as Ruffer Diversified Return and more defensive fixed income investments which were discussed in our last update.

Furthermore, Tideway were given confidence to look through the noise and that material changes were not necessary after Macro strategists TS Lombard communicated to their clients on the 5^th August.

‘Friday’s weak NFP (Non-Farm Payroll) print put recession risks front and centre. However, one disappointing payrolls release is not enough to declare one: (1) 114k new jobs are consistent with economic expansion; (2) cyclical sectors are still adding jobs; (3) the rise in unemployment rate was driven by higher labour force participation, not an outright reduction in employment.’

Although we have not made any changes to our portfolios in the period, our portfolios are predominantly made up of active managers and are often able to take advantage of periods of volatility and add securities to their fund which were previously too richly priced. We have not been able to discuss this with them yet, though would be surprised if their portfolios remained static over the period, especially those managers who have a healthy allocation to Japan.

Looking forward, markets will continue to look towards macroeconomic data for clues on the strength of the US economy, and whether a soft landing is still the most likely outcome, and for guidance on the likely timing of Federal Reserve rate cuts. Markets won’t have to wait long as by the time our investors read this, Jerome Powell’s speech later at the Kansas City Fed’s Jackson Hole symposium would already have happened.