Five ways investors can spot signs of a turbulent market

10 January 2018

Investor confidence is growing in 2018 as markets continue to rise, but it may be prudent to keep an eye on five signals of turbulence ahead.

The FTSE 100 left 2017 trading above 7,700 points for the first time ever, suggesting that confidence is booming among investors, but the current market environment could be described as the most hated bull market ever. ‘Cautious optimism’ is the phrase given when being advised on how to approach it.  

The big question at the back of many minds is how long can it last? This is a very difficult question to answer. But there are indicators that investors can look to in order to get a sense of when things might start to become bumpier – or even a sign that the markets are in bubble territory.

According to investment platform AJ Bell, there are five signals that make excellent indicators of trouble for markets.

However at present, Russ Mould, investment director at AJ Bell, explains that they all point towards good times ahead: “None of these five signals look to be flashing danger – if anything all are flashing green for go, although after what is now almost a nine-year bull run in UK stocks, even that could be a reminder of Warren Buffett’s aphorism that the right time to be fearful is when everyone is greedy and the right time to be greedy is when everyone is fearful, and right now there is little, if any, fear in evidence.”

Here are the signals to keep an eye on.

1.Falling transportation indices

The theory behind transportation indices is that if they are performing poorly, industrial stocks will also be suffering. This is because if industrial firms aren’t selling products, there’s less work for transport companies to do as they’re not shipping as many products out.

However, the FTSE All-Share Industrial Transportation and America’s Dow Jones Transports indices are both performing admirably currently. 

Source: Thomson Reuters Datastream, January 2018

2. Falling copper indices

According to AJ Bell, copper is a great barometer for global economic health. This is because as a commodity, it is used in a vast array of industries such as in the production of goods including electronics, cars, and homes. In 2016, the precious metal hit a six-year low but has been on the rebound ever since. Further price increases should keep investors positive about the direction of the markets. 

Source: Thomson Reuters Datastream, January 2018

3. Falling small cap indices

Small caps (small companies) tend to be a strong bellwether for investor confidence in markets. Small cap indices fall faster in times of low confidence and outperform leading indices in times of bull markets. Both the UK’s FTSE Small Cap and America’s Russell 2,000 performed well in 2017, even if not in the headline-grabbing way that the FTSE 100 rose. 

Source: Thomson Reuters Datastream, January 2018

4. Market volatility

Market volatility has an upside as it can allow an investor to grab a discount or provide a seller with an opportunity to dump their stock for a premium. But generally, the less volatility the better, as most investors want to grow their money over time rather than ride peaks and troughs.

In 2017, volatility was low as the FTSE 100 experienced an open-to-close movement of more than 1% just 15 times in 2017. That was the lowest total since 2005, which experienced 18. A lack of volatility also allays fears of a bubble, as the more frenzied trading becomes, the more likely the bubble will be to burst.

Source: Thomson Reuters Datastream, January 2018

5. Cuts to dividend payments

Businesses are usually very reluctant to cut shareholder payouts – known as dividends – as this badly affects share prices in most cases. So, they’re only likely to do this if they forecast a stormy time ahead.

Currently, the FSTE All-Share yield is 3.6%, compared to a 10-year gilt yield of 1.31%. For context, since 2008, the FTSE All-Share has only given a yield of 2% or more twice since 2008. On both those occasions, the stock market was in rude health. 

Source: Thomson Reuters Datastream, January 2018

Add new comment