Rate fears, trade tensions and political uncertainty trigger a broad sell-off
After a relatively calm September, the financial markets were hit by October storms. The main stock markets fell 5-7% in sterling terms, with Asian markets around 9% lower. The main emerging-market index was 23% off its January high, formally entering bear-market territory. European banks and Amazon also acquired the bear-market label. Early November, however, saw shares rally by around 2%.
The Fed triggers the sell-off, then bonds rally on safe-haven demand
In early October, Jerome Powell, Chair of the US Federal Reserve, warned that interest rates might need to be raised further than investors had expected in order to prevent inflation from overheating. Subsequent minutes showed that a majority of members shared this view. The US 10-year bond yield ratcheted up to 3.25%, the highest in seven years. This had not been factored into market valuations and triggered the fall in stock markets. In an ironic twist, the US bond then rallied, sending the yield 10 basis points lower, as investors sought the relative safety of government bonds.
President Trump failed to disguise his irritation, despite publicly respecting the central bank's independence. His comments ranged from the mild ("I don't think we have to go that fast" in raising rates) to describing the Fed as "having gone crazy" and being the biggest threat to him and the US economy. The Trump Twitter feed also threatened another round of trade tariffs on China.
Italian budget rejected, Merkel steps down as party leader
Europe witnessed further loss of momentum in the rate of growth, but a pick-up in inflation to 2.2%, the highest since 2012 and unambiguously above the mandated target range. Politics dominated the headlines: the Italians officially submitted their budget proposals to the European Commission, which sent them home to do their maths homework properly and resubmit. Following poor state elections, Chancellor Merkel announced that she would step down as party leader in December, but would continue as Chancellor until her term finished in 2021. Tedious Brexit discussions continued with little obvious sign of progress.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
The fall was no surprise, but the timing was hard to predict
That stock markets fell was of little surprise; it was the timing that was harder to predict. Equally, the subsequent rally could have been expected. The challenge came in knowing where we would go from here. From a technical viewpoint, most stock markets looked to have tipped over, and the magnitude of the fall meant there was room for further price increases while keeping the declining trend in place. On the other hand, economic growth was broadly positive, even more so in America, where recent company earnings and workers' pay surprised to the upside.
One further consideration, arguably the most important, was the level of leverage in the market. Investments on borrowed money become less attractive as the cost of borrowing rises, and falling prices compound the difficulty, often leading to forced selling. Fears of higher US interest rates, company guidance that higher costs and trade restrictions would impact future earnings, and widespread political worries all contributed to the sell-off. But these concerns were not new; they were present during the bull market and would continue in one form or another.
The major sea-change was that the global economy had switched from monetary stimulus, with central banks seen as ongoing buyers of assets, to monetary tightening. The lack of constant central-bank support would not preclude sharp rallies, but it would make the future direction of investment markets far less certain.
The global economy has switched from monetary stimulus to monetary tightening, making the future direction of markets far less certain.
We used the sell-off to add a bit more risk across the portfolios, buying a multi-strategy fund that is currently focusing on value, a keen theme of ours.
Adding risk during the sell-off
We used the sell-off to add a bit more risk across the portfolios, buying a multi-strategy fund focused on value.
Further reducing fixed interest exposure
We took advantage of the brief rally in fixed interest funds to further reduce our exposure to rising interest rates.
Diversifiers: mixed results
Although our holdings within absolute return funds proved disappointing, our other diversifiers, property and gold, showed minor gains.
Underweight fixed interest
We remain underweight fixed interest, preferring equities, property and alternative investments. Where we do hold fixed interest, we mostly use funds that have limited exposure to rising interest rates.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
Make an enquiry →