Equity markets at the start of October are once again under the cosh, a month that has seen volatile times historically. Equity indexes have stopped a directional move and now appear to be stuck in trading ranges. The Stoxx Fifty index of the largest companies in Europe has traded within a range of 3600 to 3000 for about five years now and is currently towards the top end. The S&P 500 of leading US companies has traded between 2700 and 3000 for almost two years and is presently almost precisely where it was this time last year. The FTSE 100 was 7000 over four years ago, right where it is today. One could argue equity prices have been extremely resilient this year after last December’s correction in the face of a continued stream of mixed economic news.
The pattern is well-trodden one as equity investors get spooked by weak macro data or geopolitical risk that could lead to a hit to growth, for example, trade wars. Markets trend to the bottom end of the range sentiment gets uber cautious, and then central banks talk risk assets up recovery in asset prices takes place. What happened at the start of this year, as the Fed changed tack from tightening to loosening monetary policy. After a weak August, September saw something of a recovery as the ECB, and the Fed cut interest rates.
The last few days have seen further weakness as the latest ISM manufacturing data, reported continued weakness and the ADP jobs data failed to meet expectations. Macro influences have taken over as leading indexes reached the peak of their trading ranges.
Post-2008, as the global economy stabilised, several well-known economists expressed their opinion that we were likely to follow the path Japanese markets did in the 1990’s post their economic bubble bursting. That did not transpire, but the bull market run of the early to mid-teens this decade has come to an end. Many technical analysts have predicted another 2008 style crash, which is always possible. This bull market has never truly been loved. It has been feared, seen driven by a lack of alternative assets and monetary stimulus.
Last months Merrill Lynch fund manager survey reported investors to remain at the top end of their liquidity range. They likewise remain fearful. The CNN investor sentiment having tipped into greed has slipped back close towards extreme fear.
The expectation is that we will get an economic recession in the next 12 months, no matter how the central banks react. The question will remain, if we get one, how deep will it go. The likelihood is that we will stay in these trading ranges. That is historically what happens during bear markets.