Have we seen the end of the bull market? Probably not
16 November 2018
The accumulation of a number of stress factors has finally caused the most significant market correction for some time. The US markets took the biggest hit in October, with the S&P 500 down 7% - its worst month since September 2011.
There are a number of issues causing concern (potential or real) at present: the US-China trade war, Brexit, Italy, the US mid-term elections, the results season, the slowdown in China and Europe...and as the catalyst, a message from the Fed that we thought was somewhat misjudged. As was the case in February, the rapid rise in US interest rates seems to have triggered this correction.
Some of these issues now look to be real risks: growth in Europe and China, and how the current political problems play out. Is the market right to be concerned? Yes, but only in part.
This is mainly because we think some of these concerns are overplayed.
Part of the slowdown seen in Europe relates to the German automotive sector, which should only be transitory. Eurozone growth will probably be 1.8% in 2018; this is lower than expected at the start of the year, but is still above potential (estimated at around 1.5-1.6%).
China’s economy is slowing, but the Chinese authorities are fully aware of this and have been implementing some easing measures for some months in order to boost growth, along the lines of 2015-2016. A Chinese hard landing has been a recurrent market fear for around 10 years now, but has yet to materialise. Will we see a hard landing this time? We are not convinced.
This is partly because there was also some positive news in October:
- The rating agencies did not downgrade Italy to junk status, which should help Italian yields to stabilise.
- Although corporate earnings were somewhat disappointing in Europe, the US had another excellent results season, without any apparent fears over future earnings.
- Lastly, we have noted a slightly less vehement tone in political discussions of late (Brexit, Italy and even President Trump).
The sharp falls recorded in October were also due in part to major sector deleveraging, particularly by systematic funds. We previously wrote about this subject in February, and there are some similarities in what is happening now.
We do not see the significant falls on certain markets as fully explained by their fundamentals.
This is the case for US equities, which have reasonably attractive valuations at present, and for inflation breakevens, which were impacted by the oil price slump during the month.
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