Markets around the world saw major sell-offs this week. Is this the start of a bear market or another false start?
This week was tough for markets, with most major indices seeing heavy selling.
US tech, the stock market’s star performing sector this year, saw some of the heaviest selling, with the Nasdaq (as of October 11 close), down by over 7 per cent this week. The tech index is now just shy of correction territory (a 10 per cent fall from peak to trough). The index is 9 per cent down since the start of the year.
The broader Dow Jones Industrial average index also suffered heavy losses, losing 5 per cent this week (measured from October 11 close).
Asian stocks also took a beating this week, with heavy selling on Thursday, which saw Japan’s Nikkei 225 index decline 3.9 per cent, the Shanghai Composite lost 5.2 per cent, while Hong Kong's Hang Seng closed down 3.5 per cent.
The FTSE 100 also saw heavy loses, falling by over 4 per cent between Monday (8 October) and Thursday (11 October). Overall since the start of October the FTSE 100 is down 6 per cent. The FTSE All Share also saw losses of 4 per cent, while the FTSE 250 declined 5 per cent.
Since then, however, Asian markets saw a modest recovery, with the Nikkei 225 closing 0.46 per cent up on Friday, while Hong Kong’s Hang Seng index advanced by 2.12 per cent.
European equities markets followed the same pattern, including the FTSE 100, suggesting a rebound may be underway.
Why did the sell-off happen?
The reasons behind the sell-off are multiple. When it comes to the US markets, analysts have attempted to make sense of the sell-off by pointing to changes in the bond market. According to Anthony Gillham, head of investments at Quilter Investors, the sell-off is simply a re-adjustment in equity markets following a shift upwards in bonds yields.
The US 10-year Treasury bond yield has, for several months now, been staging a recovery and has now moved up to 3.2 per cent. The rise has spooked equity markets. Higher bond yields make lower risk bonds more attractive, and in response there has been a move out of equities.
He adds: ‘This phenomenon (rising bond yields) has been developing gradually so this is not a surprise and a correction has looked possible for some time.’
The rise in bond yields has come on the back of the strength of the US economy and the actions of the Federal Reserve, which has begun tightening monetary policy. Further interest rate rises in the US are in the pipeline, and if rates continue to go up bond yields will follow suit.
Other commentators, though, have seen the sell-off as the result of markets finally factoring in the cost of US president Donald Trump’s trade tariffs.
As Paul Donovan, chief economist at UBS Global Wealth notes: ‘Around 80 per cent of global trade involves multinational (generally listed) companies. A bit less than half of S&P earnings come from outside the US. However, listed companies are only 25 per cent of the US economy. Equities are at greater risk than the economy if trade is taxed aggressively.’
Fears over US tariffs on China also contributed to the fall in Asian equities over the past week.
Time to buy the dip?
According to Royal London Asset Management’s head of multi asset, Trevor Greetham, the answer is yes. He notes that longer term economic expansion should continue into 2019, which should propel stocks higher.
He adds: ‘Investors should note that US tax cuts and spending increases are still feeding through, interest rates elsewhere in the world are very low and China is easing policy to offset trade war fears.’
With this in mind, Greetham notes that he has been buying equities, invoking Warren Buffett’s dictum to be fearful when others are greedy and greedy when others are fearful.
Simon Edelsten, co-manager of Mid Wynd International investment trust, has a similar view but is slightly more cautious. While noting that a corrections are ‘like shopping opportunities’, he says he will be ‘watching to see where things settle.’
‘Last year and going into this, US growth stocks performed outstandingly well, but that level of performance was not sustainable,’ he says.
‘Whenever markets change a gear it unsettles investors. On top of this we have had bond yields rising, and the effect of Trump’s trade war on emerging markets has not been helpful either.'
Likewise, Gillham argues that economic fundamentals are still supportive of stock prices. He adds: ‘For long-term investors looking at markets today it is important to bear in mind some of the key fundamental factors. Little has really changed for the global economy.
‘Strong growth in the US continues and the macro economic environment remains stable, with reasonable global growth, despite some pockets of weakness. Corporate earnings growth is reasonably strong and ultimately that is the fundamental factor underpinning the case for any stock.’
Another false start?
The past few years have seen several false starts for the much anticipated end of the bull market. Most notably in February of this year stocks saw a sharp drop, but soon recovered their poise.
Indeed, markets do go long periods without the sort of earth shattering crashes seen during the great depression or global financial crisis of a decade ago.
Looking at data put together by Yardeni Research, Ben Carlson, director of Institutional Asset Management at Ritholtz Wealth Management, notes that while such historical market panics are often seared into our memory, many sell-offs in the 20th century were comparatively mild.
‘Many investors seem to assume the next downturn will be another scorched earth scenario,’ he says.
‘But if history is any guide, it’s also possible that scenario could be a long time coming.’