So far the old adage, "Sell in May and go away" has been entirely appropriate for almost all of the world's markets. Volatility has burst back into prominence.
The extra-ordinary string of market-negative comments in most of the recent financial press, signals a sharp and very significant deterioration in sentiment. After all, when it comes down to it, it isn't the news that causes markets to behave differently but people's reaction to the news! Or, more simply put, a key change of sentiment.
There were so many adverse stock market comments that it's certain that every reader of this newsletter will have seen at least one. From last Sunday's Daily Telegraph:
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"The equity bull market is dead, say City experts."
Teun Draaisma, head of European Equity Strategy at Morgan Stanley, was quoted as saying "The bank is advising clients to take what profits they have made and reinvest in defensive stocks We recommend our clients to be defensively positioned. We are in for a very troubled summer."
Also, in last weekend's Financial Times, Chris Brown-Humes wrote a piece entitled "Equities' lack of momentum could end with a correction.
The headline begs the question what next?' Corrections have only two likely outcomes.
It may just be that the market is short-term overbought whilst the fundamentals remain good. In which case, it is mostly short-term leveraged traders taking money off the table. Such a correction will cause a modest pull-back and lead to an opportunity for long-term investors to add to positions at lower prices. Or the correction is of great significance and has wealth damaging potential. It is the start of a long-term primary- trend reversal that will take prices much, much lower.
The view at RHAM is that we suspect, for the major stock markets of the world, that this correction has serious long-term implications; it is the awakening of the "Bear" who created such damage as the new millennium commenced. The action we have taken is to increase to 15% "bear fund" holdings that were already in place. For portfolios where bear funds are currently not held, they have been instigated.
We choose to believe that Japan may be different, it is a new bull market in its early stages and the correction here will be part of an ongoing bull market story not a reversal of primary trend. For the time being Japanese holdings are being held but watched carefully.
The good news is that this may represent a huge opportunity in China, India and the like, they should now retrace to a level where they will be exciting new investment buy opportunities.
By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.
For more from RHAM, visit https://www.rhasset.co.uk/
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