Markets start to recover – is the worst of the sell-off over?

After a grim October, markets around the world appear to have stablished this week, primarily on the back of growing optimism around the US/China trade dispute.

After a grim October, markets around the world appear to have stablished this week, primarily on the back of growing optimism around the US/China trade dispute.

On Thursday (1 November), president Donald Trump tweeted that he had had a “very good conversation” on trade with Xi Jinping, the president of China, giving hope the trade war that has dogged markets this year may soon come to an end. 

This helped to create a broader positive sentiment, spurring hopes that the heavy selling market that occurred in October may now be over. As Rebecca O’Keeffe, head of investment at interactive investor notes: ‘Investors who had been running scared for most of October are now racing to become invested again, with a wave of money flooding into the market.’

Despite closing slightly down on Friday's trading, the FTSE 100 closed with gains of 2.38% this week. 

US markets (at the time of writing) are a slightly more mixed picture. US stocks have enjoyed a recovery this week and made some solid gains, with the S&P 500 logging its first three day winning streak in over a month.

However, US performance was still patchy. Major US indices have struggled so far on Friday, following stronger than expected jobs figures in the US causing treasury yields to edge upwards.

Chinese stocks, however, saw a bounce back after a tough year. The Shanghai Composite Index was up 3.16% on the week, while Hong Kong’s Hang Seng (which lists many Chinese stocks) posted a gain of over 6%. Tencent, the Chinese tech giant listed in Hong King, managed to recover some of this year’s lost ground, rallying by 14.8% this week (however, it is still down over 27% year-to-date).

Japan also saw some recovery, with the TOPIX index closing 3.32% up on the week, while the Nikkei 225 advanced by 4.32%.

Will the market fall further?

Despite these gains, most markets still remain in the red year-to-date. However, the recovery has given hope that October’s selling was a correction in the mould of the February sell-off this year, rather than the start of a more prolonged market downturn.

Which way markets will go from here is hard to say. However, according to figures gathered by Ben Carlson, director of institutional asset management at Ritholtz Wealth Management, market falls of 10% (which is roughly what many major markets fell by in October) usually don’t result in a bear market.

Using data from the S&P 500 going back to 1928, he found that “roughly 60% of the time a 10% correction didn’t lead to a bear market while roughly 40% of the time it did.” At the same time when stocks fell 10%, 44.7% of the time they didn’t fall any further than 15%.

Of course, while none of this is able to predict future market movements, Carlson notes: “Historical information like this can help put things into perspective.”

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