American equity markets had, until this week, managed to avoid the general sell off that had been occurring in China and Europe in particular. This week they finally reacted as leading US equity indexes fell around 4%, even after a 1% recovery on Friday. The Dow Industrial index falling 1400 points in 2 days. The FTSE 100 falling a similar amount this week and has now fallen 9% this year in absolute terms. The Vix fear gauge climbed to 25 at one point this week, the same level it got to during the correction period earlier in the year. These times then bring on debates about market crashes, is this the end of the Bull market? The start of the next bear market?
Bear markets occur during economic recessions and although the IMF lowered their growth forecasts for the global economy this week. They did not expect a global recession in the next couple of years. Therefore, it would lead us to conclude we should not get a bear market. That does not mean to say stocks can rise without pausing for breath at any time. Equity valuations on the technology sector had looked stretched and some of that froth had to come out eventually.
October may continue to be a tricky month, although markets in Europe and China have been weak for some time, this is less so for American ones. We have started the earnings season this week in America. Three major US banks reported on Friday, Wells Fargo, JP Morgan and Citi, all reported strong growth in earnings in the third quarter. This probably helping calm Wall Street nerves on the last day of trading for the week. The earnings season will be important to market sentiment. The other major event the market probably wants to get out of the way is the mid term elections. Then maybe the market can focus on a yule tide rally.
Post Trump’s comments last week and the more recent hawkish stance from Jerome Powell, the release this week of the minutes of the last Federal Open Market Committee meeting will be of interest. The market will want to understand the balance of hawks and doves within the committee, and is the balance changing. As the Chinese stock market has had a particularly bad year, leading to concerns this may be reflecting a broader weakness in the domestic economy the release of Q3 economic growth forecasts will also be eagerly anticipated by bond and equity investors.
Finally, Brexit, turning into more confusion as Theresa May tries to force the idea that we could delay the process by a year and continued talk of a no deal. Theresa May appears to be alienating both the remainers and the Brexiters with her proposals. If the markets start to fear an election could be on the cards, sterling could once again be under pressure.