October 10th's market reaction

Oct 11, 2018 | Robert Thomson


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Good morning.

 

Yesterday we saw a large drop in the major world indices.  The catalyst for this seems to be a number of factors, including:

  1. Widely held expectations that the Fed will increase its lending rate later this month
  2. Recognition of rising bond yields, similar to the situation that occurred in late January this year
  3. 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.  

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