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Equities sell off

Date: 15/10/2018
Category:

Last week saw an intensification of the equity sell-off which started the previous week and global equities have now fallen around 7% from their September high. There was little new news to scare the markets – unless you count President Trump calling the Federal Reserve ‘crazy’. Rather, it was more a case of the sell-off feeding on itself, no doubt helped by computer-driven quantitative strategies which are forced to sell if there is a sudden jump in volatility or change in market trend. 

In the midst of a sell-off, it can be all too easy to conjure up reasons why it might mark the end of the bull market. The reality, however, is that nine times out of ten, it is not. In fact, there have been some twenty market corrections of over 5%  since the bull market began ten years ago - none of which proved fatal.

We see little reason why this correction should prove any different. Bull markets don’t just die of old age but have to be killed off and there is little reason to expect the grim reaper to make an appearance for a while yet.

While the current environment of rising interest rates undoubtedly makes life more difficult for equities, rates are not yet - even after the recent jump in US Treasury yields - at levels high enough to cause equities big problems. Indeed, equities should continue to garner some support from decent growth in corporate earnings which should be confirmed by the US reporting season that started on Friday. Equities are also a sizeable 15% cheaper than at the start of the year.

None of this is to say the current sell-off couldn’t have further to run near term. Moreover, while we don’t think the end is nigh for the bull market, we have for a few months now been underweight equities, believing the risks are higher and prospective returns lower than before. Although equities will very likely recover in due course, we believe discretion is the better part of valour at this late-ish stage of the cycle and plan to retain our cautious positioning.

Last week, we avoided mentioning the 'B Word'.  This week, it’s rather harder with the Government desperately trying to solve the Irish backstop issue ahead of the EU summit this week. All the same, all that can be usefully said at this late stage of the game is that the uncertainties over Brexit remain as great as ever.

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