Without saying, investors just can’t wait for October to end.  The S&P500, Nasdaq and TSX are falling into or nearing correction levels (defined as falling at least 10%). It has been an incredibly difficult month, with the S&P500 (thus far) only having five positive days during the month and never once posting back-to-back gains.

With this negative backdrop, the main questions is: “When is it going to end?”

Before answering those questions, we think it is important to consider whether at this moment in time, a pullback in the North American markets is justified. We believe it is, and it’s important for investors to dispel any notion that the markets are behaving irrationally. Let’s single out three factors.

First, global equity markets (Europe, Canada, China, EM) had been weak throughout the entire year and the US had been the sole outlier in 2018 by posting handsome gains.  Although the US does have one of the strongest economic fundamentals, investors should not think it would be forever immune from slowdowns in other markets.  If China’s GDP is starting to slow down (albeit, still 6%+) all markets, directly or indirectly, should feel it.

Second, the rhetoric coming from Federal Reserve Chairman Jerome Powell, is justifiably worrisome. Investors should not be surprised that markets have knee-jerk reactions to sell when Powell removes the long-standing description of monetary policy as “accommodative.”  He has also signaled to markets that four more rate hikes should be expected (one more in 2018, three more in 2019) and that he may even be willing to overshoot on the rate hikes. It can be argued that with last quarter’s GDP print of 4.1%, record low unemployment at 3.7% and some signs of inflation – the Fed should indeed raise rates. That said, as we have said all month long: this is a good economy, not an exceptional one. In other words, this is a healthy economy, but not an immortal one.  Raising rates indiscriminately or having the Fed put less reliance on the economic data to justify rate hikes, can be scary for many investors.  The Fed has proven in the past (most recently in 2008), that they can drop the ball on the speed and timing of interest rate changes.  This can, of course, lead to economic and corporate earnings slowdowns. Should the Fed raise rates? Perhaps…. but they should also pay more attention to some of the small “cracks” that are appearing, which should give them some pause.  These include slower mortgage applications (reflecting housing health), weakening auto sales (reflecting industry and consumer) and the fact that throughout this earning season, CEOs have repeatedly mentioned rising input costs and tariffs as hurdles to overcome.

Finally, we have to mention Trump.  However you may feel about his administration and whether you give him credit for the post-election market gains is beside the point. We can objectively observe that the market has not found it favorable to have a lingering trade war with China, nor does it appreciate his public criticism of Jerome Powell’s aforementioned plans to hike rates. The uncertain outcome of trade negotiations (and their current state of “limbo”), has caused uncertainty to permeate the market. This has forced many portfolio managers to lock in profits as they come to their October year ends. And by continuously blasting Powell, Trump is indirectly pushing the Fed Chair into a corner, where he may be forced to raise rates just to prove that he is acting independently from the President.

October has appeared to breed the perfect storm. Not only is October already a historically seasonal weak month in the year, but when you add geopolitical tensions, rising rate rhetoric, upcoming mid-term elections, Saudi Arabia conflicts, Iranian sanctions , and rising input costs …well… it does make sense that we are lower. Therefore, rather than being surprised that the market is lower, instead it should just be the speed and magnitude of the drop that has caught you (us included) by surprise. But that is what happens in the world where computer and algorithm trading dominates. Market movements are fast. In times like these, even the most bullish buyers are forced to the sidelines waiting for it to end. At this point it is difficult to call an end to the volatility without any change to the above narrative. Rather than trying to time the market by selling now and risk missing the subsequent turnaround, it may be best to spend the time to understand why markets have fallen.  This market narrative will develop and change. Spending time to recognize the three factors mentioned above and watching any changes to them is the best homework you can do right now.