Bond markets may have calmed equity markets remain edgy. October is often considered a difficult month for equity markets, possibly as some of the most notable corrections in time have happened in October. Despite this, historic records suggest that traditionally September and February are the worst. October is not great but certainly not one of the worst. This one is proving tricky. Asian equities overnight on Monday took another leg down, dragging Europe with it. Equity markets in Europe including the UK remain down circa 10% this year. America indexes are the only ones that remain in the positive territory of all the developed markets.
Investors are adjusting to higher US Treasury yields and heightened geopolitical tensions and the possibility that economic growth has peaked from here. With decent earnings growth this year and weaker prices, valuations are beginning to look more attractive, particularly in Europe.
At these times it is hard to know how to add value, equity markets run with the economic cycle over the long term. As the global economy grows so should companies exposed to that growth. At present, the global economy is expected to grow. What investors are unsure about is what is happening to the Chinese economy and what does the fall in Asian markets tell us about that growth? If the Federal Reserve continues to raise interest rates and move to a more restrictive policy economic growth will slow and equity valuations need to adjust.
Whilst one waits to find the answer to these questions’ equity investors will want to stay on the sidelines. This continues until they get some clarity or until they feel that the correction has been enough. At least after a weak start, Wall Street gained some poise at the end of the day.