Investment Patterns Are Changing – Is A Correction On The Way?

Investment Patterns Are Changing – Is A Correction On The Way?

over 3 years ago2 mins

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According to American banking giant Morgan Stanley, several longstanding investment patterns have broken down recently – and the rise of a few unusual new ones may also encourage investors to brace for a coming correction… 😖

What does this mean?

Investments, at least in the US, are currently enjoying an “everything rally”: thanks to unprecedented central bank and government stimulus, the prices of stocks, gold, and government bonds have all risen rapidly in spite of economic contraction, an ongoing pandemic, and election uncertainty.

Such relationships are rare – and Morgan Stanley says they’re often a sign of imminent “correction”, i.e. a price decline of more than 10%. Yet ominous prodigies abound. The S&P 500 index of US stocks historically moves in lockstep with consumer confidence, but this correlation is at its weakest in 20 years: the former is up 50% since March, while the latter has fallen to a six-year low.

US confidence appears to be even lower than at the height of lockdown
US confidence appears to be even lower than at the height of lockdown

The Citigroup Economic Surprise Index, meanwhile, is at its most positive ever – but correlations between stock-market sectors are their lowest on record. As tech stocks have soared, financials – which typically do well during economic recoveries – look lackluster. And while US government bond yields are also historically low, stocks typically bought in response for their high dividend yields (such as real estate investment trusts, utilities, and consumer staples) remain unloved 💔

Why should I care?

It’s not just Morgan Stanley; other influential investors are warning that the glut of cheap money unleashed in response to coronavirus has made the recent rally unstable, risking a return to price levels last seen in March.

Liquidity and volatility may also be flashing warning signs. S&P 500 exchange-traded fund (ETF) flows are falling, while the VIX index of expected market volatility has, unusually, risen in line with US stocks. That might be due to an explosion in speculative options betting on tech stocks’ continued rise leading to investors “hedging” their positions – which could also serve to exaggerate eventual falls.

There’s been big rise in optimistic “call” options traded on the New York Stock Exchange
There’s been big rise in optimistic “call” options traded on the New York Stock Exchange

These may have already begun with tech’s (and therefore the S&P 500’s) sharp drop on Thursday. Still, a short-term correction could be good for markets’ long-term health – as well as offering an opportunity to get more bang for your buck through dollar-cost averaging.

For its part, Morgan Stanley suggests using any dip as a chance to buy up underperforming sectors – specifically financials, industrials, materials, and health care – on the basis that they’re likely to do well in the event of a “V-shaped” economic bounceback becoming a reality 🤞

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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