Christmas always comes round quicker than you think

Equity markets in the US are finally catching up with the recent rise in bond yields, as is always going to do at some point. Donald Trump did not help matters describing the Fed as crazy and making a “policy mistake”. The suggestion of a policy mistake is something equity markets have debated and given the Fed the benefit of the doubt over. By suggesting they have made a mistake, obviously will unsettle equity investors. History tells you that bond yields rise, equity markets correct to adjust and then, assuming forecasts for economic growth remain intact, recover once again. The IMF, at its annual conference, did marginally lower their economic growth forecasts for the coming couple of years but are nowhere near predicting a global economic recession.

Global equity markets are now down on the year in absolute terms, US equities which were enjoying another good year are now marginally higher than where they started the year. The FTSE 100 and the Dax down circa 10 pct from the highs they reached earlier in the year. The NASDAQ index has likewise given back approximately 10%.

It is interesting to note that the correction earlier in the year was driven almost entirely by an over euphoric mood, this time sentiment was far more cautious into the sell off. Chinese equities are a concern as they have lost a fifth of their value this year post the recent selloff.

What will happen now is always difficult to assess, one would suggest that sentiment in American equity markets may need to get more depressed. Sentiment in Europe must be getting close to capitulation. Equity markets often need that point of capitulation, when investors and speculators want to leave the building by the quickest route, before the recovery can begin. Maybe that is what will bring something of a narrowing of performance from either side of the pond.

The Vix index, quoted as the fear and greed gauge, has jumped above 20 that has been historically a signal fear has taken over greed. We also have the mid term elections to contend with and traditionally that has not been a good period for US stocks.

Personally, as painful as these times are its where the opportunities come to make money. It is like the Christmas sale except the difference here is one can get the opportunity to buy the good stuff as well as the stuff you buy because its cheaper than it was. That must be remembered.

Posted on October 11, 2018 .