Yesterday we saw a large drop in the major world indices. The catalyst for this seems to be a number of factors, including:
- Widely held expectations that the Fed will increase its lending rate later this month
- Recognition of rising bond yields, similar to the situation that occurred in late January this year
- Predictions that corporate earnings may not be as high as originally thought.
Some comments on this for sober second thought:
- The first point is not new. The US economy is continually growing. Jobless rates are at an all-time low. Interest rates are also extremely low. The Fed needs to keep inflation in check and slow the economy to a reasonable pace, and it does this by raising interest rates. This is a good sign for how the economy is growing.
- The second point is also not new. There has been a bit of a spike recently, but yields are expected to rise and the market may be looking at the drop that happened in January and jumping the gun a bit.
- For the Third point, note we are still talking about corporate earnings, and not losses.
- The unfortunate situation of Hurricane Michael making landfall in FLA may have contributed to the sell-off, as investors react emotionally to the bad news.
So, in all of this, we are not talking about a recession. The lead up to the US Mid-terms is historically a time of volatility. It is also usually followed by a rally.
This could be a short term dip or it could be a correction, but a correction is followed by a recovery. We do not believe we are at a point where this is the beginning of a recession, where we see a steady decline in the market. Our outlook for continued global growth remains in tact.