Market moves at the end of last week have prompted discussion of whether the world's major stock markets might be overdue for correction.
Experience shows that markets will undergo a correction, defined as a fall of around 10%, on average once a year. It is now around two years since the UK underwent a correction (mid-2015 according to London Stock Exchange records), suggesting one is overdue, statistically at least.
Technically speaking, the Dow Jones Industrial Average (DJIA) has not had a correction since October 1987 (Black Monday).
The statistics show that many of the major markets fell slightly on Friday (1 December). The S&P500 was down 0.69%, the Nasdaq Composite fell 1.13%, the Dow Jones Industrial Average slipped 0.56%, the FTSE100 0.36% and the FTSE Eurofirst 300 0.74%.
Dipping and sliding
The Hang Seng index was down 0.35% and the FTSE All World $ fell 0.46%. Markets in Mumbai, Korea, Spain, France and Germany also dipped.
From a broader perspective, the DJIA reached an all-time high last week, breaking through the 24,000 mark for the first time ever. And the S&P 500 was still overall up on the week.
There would appear, though, to be little consensus on what happens next. Especially as there have been widespread predictions of crash and correction dating back a number of months.
Valuations look stretched
Some market professionals predict continuing positive movement even while conceding that valuations already look stretched. Some take the opposite view and say a crash will come in equities markets.
Seasoned participants will respond by pointing out that it is the very lack of consensus that makes markets what they are. One investor's rubbish is another's pot of gold. One investor's long position is another investor's short position.
Corrections can present buying opportunities for investors.
Even the professionals, people paid to know about arcane economic matters, and make the right investment calls, disagree strongly, often citing the same underlying facts and figures to justify their own view.
Sound asset allocation
What are we mere mortals to make of this state of affairs? The simple but boring answer is to make sound asset allocation decisions. Spread risk by asset class, geography, sector and individual stock selection. That of course is how professional investment managers earn their money.
Chris Iggo, chief investment officer fixed income at AXA Investment Managers, is by definition a bond specialist. But he has words of wisdom to share on the topic of equities markets and where they might go from their current elevated positions.
In the real world the word bubble is being used more and more in discussions about the US stock market, he says.
However, recent price action set against extremely low levels of volatility means stock investors have rarely had it so good. There is more focus on equities because strongly valued bonds offer little updside, he adds.
“Is this late cycle stuff? Who knows, the economy is certainly not slowing down. But with 20% total returns this year, a bout of profit-taking would not be a big surprise. Profit-taking typically sees markets stopped in their tracks, even reversed, if only temporarily.
Chris Iggo, courtesy of AXA IM
Trump success could drive US stocks
A suggestion spotted elsewhere over the weekend, however, is that President Trump's belated success in pushing through tax reform measures could be positive for US stocks.
It seems that if there is going to be a change in the dynamics, it would come from the equity market, says Iggo. But the economy is strong, strong, strong, he insists, despite misgivings over market valuations.