MSE News: 'Don't panic', investors are told, amid market slump

dunstonh

Do people think that the market has already accounted
for the U.S credit downgrade (knowing it would happen),
or will we see another big slide on the FTSE and DOW
on Monday because of it?

The rumour of the S&P downgrade happened during Friday trading. So, some of it may be. Problem is that not everyone believed it would happen. So, a drop on monday is probably likely. However, some think it may actually be a good thing if it forces the US to take action. The downgrade is mostly because of political reasons rather than financial. As with all things on the markets, you never know and its often futile to even guess.

sorcerer

I agree these sort of things are going happen, you should be concerned with macro economics, if you have a long term view.

talexuser

Does anyone think the line that part of the downgrade was because of computer programmed stop losses, as many traders are on holiday and not taking a full view of the fundamentals, as propagated by one pundit on the tv has merit?

Ark_Welder

talexuser wrote: »

Does anyone think the line that part of the downgrade was because of computer programmed stop losses, as many traders are on holiday and not taking a full view of the fundamentals, as propagated by one pundit on the tv has merit?

The S&P downgrade of US debt? If so, then no merit at all. The downgrade isn't decided by stock market traders!

If you're despereate for some bedtime reading...

http://img.en25.com/Web/StandardandPoors/2011-06-30_sovereigncriteria_sp.pdf

talexuser

sorry I phrased that very badly... I meant the downturn in stocks.

DdraigGoch

Interrupting the procedings here with a question from a complete novice - my only remaining savings are in a bond. When I enquired about the actual, cash in value about 3 years ago I learnt of the Market Value Reduction clause, in that if the Bond was somehow - remember I am a novice and haven't a clue what these things mean! - overvalued then the payout would be 25% or so less than the apparent value, the question is, is it worth considering keeping my reserves in this bond, which has performed quite well over the past 7 years, or should I be learning a bit more and possibly taking income/cashing in?

I am prepared to leave it, I can cope for a few months yet, but I'd like to have at least a smattering of an understanding of my position.

Your help would be most appreciated. Many thanks in advance.

jamesd

cepheus wrote: »

Real returns are 4.3% for US market and roughly 2.5% for UK market between 1921-1996 with a median of 1.5% after allowing for inflation. See page 31.

http://faculty.fuqua.duke.edu/~charv.../GJ_Global.pdf

The correct URL seems to be http://faculty.fuqua.duke.edu/~charvey/Teaching/BA453_2005/GJ_Global.pdf .

They didn't use the normal RPI or CPI inflation measure but instead used a wholesale price index - see page 6. It also seems that they may have converted all local market returns to US Dollars, so exchange rate changes compared to the US Dollar would be distorting the results, though their description is unclear on this.

Using a rather better dataset - the (Barcap) Barclays Equity Gilt Study data in the First Report of the Pensions Commission - you'll find that the actual inflation-adjusted return for the UK market for all twenty year periods from 1899-2003 had a median of 6.5% and mean of 5.7%. For the period since 1977 it was mean 10.4% and median 11.5%. Both taken from Figure C.10.

The very large discrepancy between the very well respected Barcap study and the 2.35% real return given in the one you're mentioning suggests some significant systematic flaw, perhaps that combination of odd inflation measure and some currency variation.

jamesd

DdraigGoch wrote: »

my only remaining savings are in a bond. When I enquired about the actual, cash in value about 3 years ago I learnt of the Market Value Reduction clause

Bonds don't generally have any market value reduction clauses, so that's a pretty odd description. Perhaps it's not a bond?

The investments that have market value reductions are typically with profits investments and they have them because they provide fake valuations to reassure investors, then if the investor sells they have to provide a correct valuation instead.

The products might have significant exit penalties for early encashment in addition to any MVR, depends on the specific product.

Cashing it in at a time when markets are down is likely to produce poor results. With no need to sell you'll get a better result by waiting until the next clear market high. But that may still be a bad idea if you lose a bonus you'd get for holding to the end of the term.

cepheus

jamesd wrote: »

You appear to have simply copied a claim made by someone else without even correcting the ... in the URL from your copying and pasting exercise. The correct URL seems to be http://faculty.fuqua.duke.edu/~charvey/Teaching/BA453_2005/GJ_Global.pdf .

If you read it you'll find that they didn't use the normal RPI or CPI inflation measure but instead used a wholesale price index - see page 6. It also seems that they may have converted all local market returns to US Dollars, so exchange rate changes compared to the US Dollar would be distorting the results, though their description is unclear on this.

Using a rather better dataset - the (Barcap) Barclays Equity Gilt Study data in the First Report of the Pensions Commission - you'll find that the actual inflation-adjusted return for the UK market for all twenty year periods from 1899-2003 had a median of 6.5% and mean of 5.7%. For the period since 1977 it was mean 10.4% and median 11.5%. Both taken from Figure C.10.

The very large discrepancy between the very well respected Barcap study and the 2.35% real return given in the one you're mentioning suggests some significant systematic flaw, perhaps that combination of odd inflation measure and some currency variation.

I did read the pdf and not blindly copied it, the URL is distorted because I have copied it several times myself.

This subject is fraught with difficulty including the start and end years. I recall another study by First Boston but have been unable to find it.

Isn't the CPI and RPI a uniquely British definition? The currency basis is a good point though, it is obviously written from a US persective since you need to base on on something and the dollar seems the obvious one, but once again the survivorship issue arises again.

The more fundamental flaw with the other studies is that people tend to focus on successful markets and forget about the failed ones, therefore there is a survivorship bias.

Thanks for the link, although it would have been useful to include some reference to avoid trawling through it.

Figure C.8 Annual Real Rates of Return on UK Equities over 1, 5 and 20 Year Periods: 1899-2003
highlights importantant issues regarding the volatility of returns

SnowMan

Interestingly the Barclays Equity Gilt Study for 2011 has been made available on the Barclays stockbrokers website here. Chapter 6 has the real return figures. Strange as they normally charge £100 for the report.

Respected as it is there do seem to be some major flaws in the report (I remember reading Paul Lewis the money box presenter pointing these out on his website see his talk transcript here).

He says the real returns on cash are understated as they use an average building society rate and the real returns on equities are overstated as they ignore equity investment charges. I won't attempt to summarise it further or comment, it is an excellent read.