Last week’s rout was sparked by comments from Janet Yellen, chair of the Federal Reserve Bank. 
Market expectations had been guided to expect at least two, if not four interest rate rises this year after the rise put through in December. This appeared sensible at the time as US economic data continued to suggest that the economy was expanding at a strengthening pace as measured by unemployment data, retail sales, GDP and Purchasing Managers Indices.
The focus of the Fed has been somewhat erratic over the last year, sometimes appearing to consider global economic conditions whilst at other times appearing more US centric.
Investors were spooked by Janet Yellen even referencing negative interest rates as if it could be a policy option – surely the US economy cannot possibly be in need of that?
Performance of indices since the US Federal Reserve’s rate hike
Source: FE Analytics
The remit of the Fed is to ‘conduct the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices’ as quoted by the Board of Governors.
This is why investors were surprised that interest rates didn’t increase last September as US economic conditions suggested the economy was strong enough to cope and the guidance had previously forewarned this was likely.
The reasons given were concerns regarding the strains in the global economy that had emerged in August involving the apparent severity of the Chinese economic slowdown. The pundits slammed the Fed for giving mixed messages and for moving the goalposts, and some credibility was lost.
Fast forward to December, just before events got really fraught in January and, lo and behold, we get an increase.
To be worried about the global economy in September and not raise rates and then to be less so in December and put a raise through, just ahead of the turmoil seen in January, suggests the Fed is out of step with their remit and flipping from one scenario to another, driven by short-term movements and volatility in the markets.
Last week was a no win situation for Janet Yellen.
If she had indicated there was no change to the previous guidance on rate increases for 2016, she would have been blasted for being blinkered and if she said they were more concerned about global growth, which she did, then this showed another round of indecision and short-term wavering.
As it happened, with the markets in a full blown bearish mind-set, her comments were interpreted as meaning that the Fed must be really concerned about future US economic growth and a global recession lies ahead.
Situations like this are where the ‘art’ of investing takes over from the ‘science’ and human behaviour comes to the fore with fear and panic dominating. This creates opportunities.
We all know about the oil price and what this is doing to connected businesses and exporting nations. The new dimension in the last two weeks has been around the safety of the banks.
Performance of indices in 2016
Source: FE Analytics
Prior to Lehman Brothers collapsing and then Northern Rock and the rest of the UK banking system, no-one had envisaged that such a thing could happen and so the markets didn’t fret about it. Now it has happened, commentators cannot rule it out and there is always a chance, no matter how small that may be.
Our view is more along the lines of logic.
The banks have been criticised endlessly for not lending over the last eight years and for hoarding capital as they rebuilt their balance sheets following the global financial crisis. In addition, there have been two rounds of stress tests, the most recent of which were only published in December 2015.
If there really is systemic risk in the banking sector after all that has been imposed after 2008, then heads should be rolling in the Bank of England and probably George Osborne would have to go as well. It would be inexcusable.
Thursday morning appears to have marked the nadir for the FTSE 100 with the index briefing falling below 5,500, which will be an important level for the chartists, not that we subscribe to this philosophy.
That said, at times of irrational volatility, round numbers and support levels influenced by charts do tend to have greater importance and can become self-fulfilling.
The investor who was fortunate enough to have decided to buy at this trigger point, would now be looking at a 6 per cent gain with the index now over 300 points higher. Wednesday was the day when the rumours surrounding the banking sector reached fever-pitch, ignoring noises about Russia and OPEC potentially thinking about some production cuts.
Friday then saw this story take hold and the oil price is now 20 per cent higher than the lows seen in late January, having risen strongly on Friday, along with the markets.
Performance of indices over 1yr
Source: FE Analytics
We added some oil and commodity exposure on Thursday which is looking quite clever right now, using cash we had raised earlier in 2015.
However, we are cognisant this could be an early call, although the downside from here looks less than the potential upside, even if we have to be patient for the latter to be realised.
We have to start biting the bullet at some point and will continue to look for similar opportunities.
Guy Stephens is managing director at Rowan Dartington Signature. All the views expressed above are his own and shouldn’t be taken as investment advice.