My Comments: History does typically repeat itself. Whether its human frailty or the laws of physics, the past is usually a glimpse into the future. Cries of ‘this time it’s different’ usually prove to be false. It’s not what happens that has a critical effect on your financial future, it’s how you manage the inevitable. I’ve been at this for almost 40 years now, and while I’m far from perfect, there are ways to mitigate the risk.
26 Sep 2015 Richard Dyson
Earthquakes and volcanoes rarely strike once only to vanish. A number of smaller episodes precede and follow the main event.
The same appears true of market routs, where a series of dramatic falls cluster within a period of several weeks, or more often months, sometimes signalling an entire change in the market’s direction.
Black vertical lines in the chart, above, show the number of days per month in which the FTSE 100 index has fallen by more than 3% – from opening to close – in the past 20 years.
While falls of that magnitude often capture front-page headlines, they are relatively uncommon.
If all such falls over the past two decades were spread out evenly, they would occur on average every 78 trading days, or once a quarter, according to broker AJ Bell which processed the data for Telegraph Money.
But they rarely occur in isolation.
On only 12 occasions since 1995 has there been just a single day within a calendar month where the market fell by more than 3%. Instead the bad days clump around wider market events, usually global in origin.
The first cluster of lines marks the crises in the late 1990s beginning in Thailand and spreading across Asia and from there to Western markets.
The two biggest concentrations of falls – including single months where there were six and seven days in which the FTSE fell by more than 3% – came in the desperate years of 2003 and 2009.
The first marked the final end of the protracted sell-off of the technology bubble. The 2009 cluster marked the trough at the end of the financial crisis.
By contrast the correction suffered since last month’s “Black Monday” (August 24) has been comparatively minor.
If the past patterns of the data are to be repeated, further days of sharp sell-offs are to be expected in coming weeks.
Russ Mould, investment director at AJ Bell, said: “If anything, the story here is the comparative absence of turmoil in the past 18 months up to August.”
He points out that downward market movements are more abrupt. This means days of 3% falls far outnumber those where the market gained 3% or more. “Markets tend to rise serenely and lose ground quickly, which again is what can make bear markets such a shock.”
Preparing for opportunities
With further falls likely, investors are eyeing sectors where the greatest value is likely to emerge – and building cash reserve in preparation.
Based on a number of measures of value including price to earnings ratio, yield, and “Cape” – the cyclically adjusted p/e – Telegraph Money identifies European and emerging markets as “prepare to buy” areas, with commercial property, bonds and gold as sectors to trim back as a way of raising cash ahead of future falls.