We're not in Kansas anymore

What is going to happen to investment values, after the recent turmoil? If only we knew; predicting short term market movements is incredibly difficult at the best of times, impossible nowadays. Impossible? Surely there are always analysts and algorithms, poised to outperform? 

I’m not so sure, and the reason is this chart. It’s a snapshot of the FTSE 100 over the past 6 months, but it could as easily be the Dow Jones or the Deutsche Borse or even Nasdaq, which has performed far better thanks to its technology bias, but is still displaying the same spiky pattern in recent weeks.

Source: FT.com, 14th May 2020 10.52

It recalls my only memorable geography lesson, when we used the contours on a map to draw cross-sections of landscapes. We were preparing for a field trip to Ditchling Beacon, at the edge of the South Downs, and carefully plotted the rolling grassland, gradually rising, followed by the sharp falling away of the scarp. We noted how the cross-section could tell us that the landscape was changing; that we should expect different uses of the land and different plants as we moved from one area to another.

That’s what this snapshot reminds me of. The striking thing is no longer the sharp fall midway along, it’s that the landscape has changed completely. Up until mid-February, we were in hilly uplands, rising and falling, with the odd valley to negotiate, and a few striking scenic viewpoints. But now it’s as if we are in the Dolomites: jagged peaks, vertiginous drops, and no foothold or place to rest; with the constant possibility that what looked to be a solid outcrop will morph overnight into an unstable slope of shifting scree.

This, to me, is a picture of a market that is very short on information, and is responding, sometimes in a knee-jerk way, to individual snippets of news. It’s not a market which has enough knowledge to be able to accurately analyse the fundamentals. It’s a market which reacts to headlines – or to how it thinks other people will react to headlines. It’s a market where there just isn’t enough information for values to be calculated properly. In other words, it’s a market largely driven by speculation rather than long term investment thinking. 

That’s a market where it’s as risky to be a seller as a buyer. One bit of good news – a rumour of a vaccine perhaps – could send markets soaring. One bit of bad news – a rumour that the virus is mutating – and they could crash back down again. It’s a market where a sharp and lucky day-trader can make a lot of money, but her counterpart can lose it all again the following day. 

What this picture says to me is that the best financial brains don’t know what’s going to happen next. It’s not a market where long term investors should be making hasty changes of strategy.

This article does not constitute advice, and no action or lack of action should be taken as a result of what is written. You are strongly advised to consult your financial adviser or a solicitor before taking any action relating to the matters discussed in this article. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested.