Red October as the last 31 days have been dubbed saw global equity markets overall fall something in the region of 8%, despite a recovery at the very end. Fears that earnings growth is slowing, and analysts are lowering their forecasts to account for trade tariffs, combined with a move by central banks to remove the liquidity put, has finally impacted equity market sentiment. At least the argument that valuations were too high to support equity prices has been removed to some degree.
Bear markets are supposed to start at the point interest rates peak. That point where the economy moves from growth to recession, by definition, must be the peak. Global monetary tightening has started but only just. On Thursday the Bank of England left interest rates where they were by a unanimous vote, however they did suggest that should a favourable Brexit deal be struck this would pave the way for further interest rate rises in the coming year. This is despite the modest cut to economic growth forecasts for this year and the next. The Bank believes the fiscal loosening that came with this week’s budget could add to growth but likewise create more inflationary pressures.
We are approaching the final furlong of a year that has turned out as expected on several fronts, but not in others. The US has continued to raise interest rates as the economy has performed. The promised tax cuts came through helping support the economy, allowing the Fed the room to raise interest rates. As fiscal policy loosened monetary policy tightened. The technology sector continued to make strides as the NASDAQ rose almost 19% at one point in the year. What was less anticipated was the US China trade war, this, along with the sugar rush wearing off from the tax reforms has led to global equity markets now down on the year.
The bulls have fought back this week, however the fight between the bulls and the bears will probably continue. The Vix index has fallen back to 20, this may suggest the bulls are beginning to win. Other things that may be in the bull’s corner, the midterm elections are out of the way in a couple of weeks, that may also provide something of a catalyst for equity prices to rise. US ten-year treasury yields have fallen recently as the equity market has faltered this to should help support equity prices. Although this equity market fall does not appear to dissuade the Fed from its chosen path.