Estimated reading time: 3 minutes, 11 seconds

Asset Managers Seek to Sooth Jittery Investors

Asset managers are aggressively seeking to calm investors in the midst of a steep equity market selloff.

After hitting a high in early October, the S&P 500 Index ex-dividends declined approximately 10.6% as of the market close on October 26. The Russell 2000 Index, which hit a high in late August, had dropped nearly 15% as of the close of markets on October 26.

Emerging markets and other foreign markets have also dropped substantially. Growing trade tension between the U.S. and China coupled with rising interest rates and fears that corporate earnings growth may moderate have caused many investors to fear that the aging bull market may be in its final days.

Against that backdrop, asset managers, while acknowledging that it is often hard to predict markets, maintain that equities still have potential for generating additional gains. Many firms are urging investors to maintain a long-term view and avoid panicking.

J.P. Morgan Asset Management has launched one of the more ambitious campaigns to sooth investors while promoting its products. Its campaign features a series of short videos that emphasize the value of taking a long-term view of investing.

In one video, the firm explains that 21 of the past 37 years have included double-digit declines, but 75% of those years have ended with equities generating positive returns. J.P. Morgan videos promote the value of portfolio diversification and argue that investing should be viewed as an endurance event rather than a sprint.

The campaign also seeks to build affinity with video viewers by using terms like “Let’s team up” and “Let’s work together to navigate markets and build strong portfolios.”

Vanguard is also urging investors to take a long-term view of markets. Its content explains that single-day holding periods for equities have only a 54% probability of producing a positive investment return. As holding periods increase, so too does the likelihood of generating positive returns. Ten year holding periods, for example, have a 91% probability of producing gains.

Janus Henderson, meanwhile, is providing an optimistic outlook for corporate earnings. If the firm’s view is correct, it could provide support to equity prices. After all, equity performance is driven by a combination of dividends, earnings and valuations, or more specifically, the ratio of a stock’s price and earnings. If earnings increase and the ratio remains constant, then the stock price will increase.

In a blog, Janus Henderson argues that S&P 500 quarterly earnings are estimated to climb by an average of 19.2%, which would be the third-highest quarter of earnings growth since 2011. The firm notes that the economy remains strong, with the U.S. unemployment rate having declined to 3.7% in September, its lowest level in decades.

The country’s gross domestic product, furthermore, grew at a strong annual rate of 4.2% during the second quarter. Economic growth, the firm believes, can increase demand for products and services, thereby supporting corporate earnings.

Janus Henderson also maintains that indiscriminant selling by investors has resulted in companies with strong fundamentals trading at attractive valuations. That includes companies with strong management teams, low amounts of debt, and wide moats that provide protection from competitors.

Putnam Investments, however, is taking a more cautious approach. It maintains that a handful of warning signs exist, such as the narrowing of the yield curve, or the difference between yields of short and long term bonds. A yield curve inversion, which Putnam reckons could occur next year as the Fed continues to tighten monetary policy, often signals a pending recession.

Putnam also explains that the auto industry and housing market, which combined represent a substantial portion of U.S. jobs, have been weakening. Putnam concludes by saying it’s too early to sound a warning for risk assets, but with current conditions, it makes sense to err on the side of caution.

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