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It is fair to say that 2017 was a stellar year for global stock markets, particularly on Wall Street. The Dow Jones Industrial Average rose by 25.1% over the calendar year, whereas the broader S&P 500 Index returned a profit of 21.8%. The main indices in Germany and Japan also posted double-digit gains, although the UK just failed to do so with the FTSE All Share Index returning 9.0% over the year.

The new year started in a much similar vein to the last one, but over the past month, global equities have suffered the first correction since the summer of 2016. At the time of writing, the US stock market has fallen by around 8% from the all-time high set in January. Similar losses have been sustained across other major markets. Does this signify the end of the “bull market”, or is it simply a bump on the road to further growth?

It is important to remember that volatility is an inherent feature of share-based investing. In that respect, a return of volatility does not represent anything out of the ordinary. Indeed, it was the complete absence of volatility across equity markets in 2017 that was unusual. With volatility returning to what may be deemed normal levels, there is no reason to be fearful. Indeed, we welcome the fact that the market has corrected itself, as a short-term adjustment reduces the risk of a more violent crash at a later date.

It is also important to understand the nature of the recent correction. It is natural to assume that the sell-off was instigated by bad news. In actual fact, that has not been the case. The catalyst for share prices falling on Wall Street was better than expected economic data, which backs up previous expectations that 2018 will be a year of impressive economic growth. As investment markets are forward-looking in nature, the strong economic data has raised fears that interest rates will rise faster this year than previously expected. This fear has, in turn, led to concerns about a potential reduction in economic growth in 2019. Although economic growth may well peak in 2018, at this stage we feel that the economic outlook remains positive over a 2 to 3 year time horizon and for this reason, we remain optimistic about the medium-term prospects for share-based investments.

In summary, investors should not be fearful of the recent increase in market volatility. Although portfolio values may fluctuate to a greater extent this year than over the past 18 months, there is currently no reason to think that a multi-asset investment strategy will not continue to provide far better returns than cash deposits over the medium to long-term.

The information in this guide was correct as at 2nd March 2018 but is subject to change. This article does not constitute as personal advice and guidance should be sought to ensure that any investment meets your individual circumstances including risk tolerance and capacity for loss. The value of investments can fall as well as rise and you may get back less than you pay in. Past performance is not a reliable guide to future performance.

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This post was written by Steven Hodgson