Investors should focus on capital preservation

IN the years from the end of 2008's US sub-prime crisis up to February 2018, US stocks rose in a virtual straight line because of expectations that unprecedented central bank easing would engineer a robust economic recovery. This came to an abrupt end on Feb 8 this year when the Dow Jones Industrial Average plunged 4.2 per cent, reportedly because of sudden worries at the time that the US Federal Reserve might raise interest rates more often in 2018 than the market expects.

Since then, various other concerns have emerged to send volatility to levels not seen in several years - the possibility of a US-China trade war; the likelihood of regulations on social media and technology companies because of mounting privacy issues; and a rise in geopolitical risks. Although some of these are not new - geopolitical risks originating in the Middle East, for example, has been an ever-present for many years with the ongoing tensions in Syria - investors would be well-advised to ponder the message the market is sending.

First, valuations. In the five to six years leading up to February's plunge, a synchronised global economic upturn amidst low inflation and zero interest rates had pushed stock prices above historical norms. Even after a rocky three months, the S&P 500 still trades at a trailing price-earnings multiple of 24, significantly above the 10-year average of 15.7.