Janus Henderson: Market plunge due to over-exuberance

For a time following the Global Financial Crisis (GFC), bad news was considered good news. Disappointing economic data was met with further monetary policy support, or at least the expectation of it. This is no longer true and, judging by the panic of the last 48 hours, may have even reversed.

At the time of writing, markets have plunged at the signs of faster wage growth and a strengthening US economy that may lead to higher inflation and faster interest rate hikes. A quickly rising cost of borrowing is unwelcome at a time when levels of corporate debt already look high.

Few places to hide

With the US Federal Reserve taking away the easy stimulus punchbowl from the quantitative easing (QE) party and the European Central Bank (ECB) telling markets that they have probably had enough, asset prices are losing some of the support that has driven valuations to expensive levels. There are few places to hide when everything has risen so strongly.

Market complacency and recent low volatility have likely led to some ill-disciplined positioning that is now being quickly unwound. History provides many examples of what happens when investors overextend themselves. However, for more dynamic investors like ourselves, these falls represent an opportunity.

Global growth continues to strengthen and inflation is still relatively subdued, meaning that this is still a decent environment for corporate earnings growth. Having previously moved to fade the surge (see Head of Multi-Asset, UK, Paul O’Connor’s recent article) in the recent exuberance, we are looking for the appropriate moment to reinvest at more reasonable prices.