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I am writing this as I await the wrath of the “Beast from the East,” which sounds more like a description of a wrestler we would have watched on World of Sport in the 70’s whilst waiting for the football scores to come in.  The nonsense about something that used to be simply called winter is remarkable.  Now if this was July I could understand why, but surely in February it comes as no great surprise.

It does however show that it is not only stockmarket movements that are prone to hyperbole.  I think it is the times we live in where everyone, whether knowledgeable or not, gets to have their say on social media and as a result it is those that state the most outlandish things that get noticed.  Take the “crash” we experienced at the start of this month.

The US market fell by over 10% between the 1st and 9th of February which, as well as giving voice to countless prophets of doom, also led to Sky News dusting off the FTSE ticker.  It was good to see this again as it had been a while since it last made an appearance.  This time I see they have it at the top left of the screen.  Obviously the bottom right is so last year! 

Well in case you hadn’t noticed there has been a bit of a recovery in the US market with the S&P currently standing only 2% lower than it was at the start of the month, although the UK is still 5% off its peak.  Although the initial fall was precipitous, the size of it was nothing to be worked up about.  A bit like snow in February it was simply what we should expect from a market.

Now it is a number of years since we suffered heavy snow so perhaps we have become a bit complacent, but even in the “good old days” not every winter was bad, although naturally we tend to remember those that were.  In fact Mr Steel has been recounting how the winter of 1963 was by far the worst he can remember, but no doubt his granny McKay would have told him it was nothing compared to 1947.

It is the same with markets. We haven’t seen volatility for a few years so as soon as it arrived it came as a bit of a shock.  Of course it is less than ten years since the end of the worst financial crisis in our lifetimes which tends to also add to the jitters when we do see, in market terms, perfectly normal falls.

The difference between now and the simple days of the World of Sport teleprinter is that 90% of all trades in the market are conducted by computers without any human intervention.  This means that when certain triggers are reached all manner of programs try and execute the same trades which lead to dramatic and extremely sharp movements.

In the 70’s once you read about the bad news in the paper, which was already twelve hours out of date, you would have had to call your broker who no doubt after he had finished a “long” lunch would have put a sale order into the stock exchange and a couple of days later a deal will have been reached.

Now we have computer server farms deliberately positioned close to exchanges to try and reduce the time it takes for deals to be executed to nanoseconds in an attempt to gain tiny advantages.  The overall size of the movements will probably end up being the same but the speed at which they occur is likely to be far quicker.

This I am afraid is the new normal and is something we will have to get used to.  The good news of course is that when the falls come, all shares, good and bad, tend to be sold in equal measure which allows the humans still involved the chance to buy the good companies at a cheaper price and I can assure you many of the managers you are invested in have been doing this very thing.  Hopefully we can all survive the “Beast” to enjoy the fruits of their labours!

Steve
Author
Steve Forbes
Managing Director
Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate tax advice

This letter is the personal view of Steve Forbes. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.

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