07 Nov Markets, Not quite a bear!
October’s punishing market movements have forced global stocks to their lowest valuations in two years. The latter has been mainly pressured by concerns about tighter monetary policy, the impact of tariffs along with mixed earnings reports from companies for the third quarter. “Major indexes in Europe, Japan, Shanghai, Argentina and Canada are all dwindling in correction territory – a decline of at least 10% from a recent peak,” stated the Wall Street Journal. Interestingly, the US isn’t far behind from joining the market-correction club after its October 26 selloff which erased all gains that the S&P 500 and the Dow Jones indexes realized for the year.
Is this a sign of an upcoming bear market?
We cannot predict with any degree of certainty whether this correction will reverse or turn into a bear market. However, what we can point out is that historically most corrections have not developed into bear markets (i.e. periods during which the market drops by 20% or more). The US has experienced 22 market corrections since November 1974, of which only four instances became bear markets beginning in 1980, 1987, 2000 and 2007 respectively. From the start of the current bull-run in 2009 through February 2018, there have been six corrections (a fall of at least 10%) that did not turn into bear markets. In fact, bear markets most typically occur with economic recessions, and as of now, the probability of a recession in the next 12 months is slim. In fact, while developed economies, other than the US, are experiencing a bit of a growth slowdown, expectations are for them to continue growing into 2019, albeit at a slower pace.
A major contributor to recent choppy markets has been rising interest rates, a by-product of significant economic growth. Indeed, the Fed has been raising rates since late 2015 as the economy has prospered, and is widely expected to do so again in December. While some may express growing concern that the Fed will raise rates too much too fast and end up hastening an economic recession, the fact remains that the Fed is on a rate-tightening path because the economy is strong. On the other hand, markets have been rattled by various geopolitical tensions notably in Italy, Turkey as well as with US/China relations.
In our opinion
Overall, markets are undergoing significant change and this does lead to increased volatility going forward. As such, we do not see the current pull back as the start of a bear market. We would advise against a hasty decision to sell out of equities at this moment. Such pullbacks are historically followed by a re-testing of previous highs, at which point, economic and market conditions may warrant a repositioning of the portfolio. Also, we must remind our clients that our portfolios are structurally underweight equities when compared to our competitors, an allocation which benefits our clients in short periods of distress, as we are experiencing in October. Having said that, we remain extremely vigilant to any significant changes in the economic or market environment.