Market Update end October

Market Update end October 981 980 Realm

This is an update to our post of two weeks ago The sell-off last week

In our September update we said that as the best-performing global region, the U.S. stock market needed to be monitored for signs of weakening. The U.S. market subsequently saw a sharp decline almost immediately after hitting a new all-time high, leaving investors reeling at the swiftness of the move. Let us now step back and look at the bigger picture.

Although a 10% market correction is a common event (this happens in most years) the speed of the recent fall in the U.S. S&P500 index had investors asking if this is the start of something bigger.

The first thing to say is that from a historical perspective equity bear markets have occurred when the economy is heading into a recession evidenced by leading indicators which suggest that a recession is close. As we mentioned in our previous post, this is not the case at the moment – “U.S. Economic Data remains strong. The vast consensus of opinion says an imminent recession is not likely” and “leading economic indicators are improving“. In light of that, history would suggest that a correction at this time is more likely to recover than to lead us into a bear market.

There is a wild card. As we mentioned before, there are real concerns that the trade war between the U.S. and China could escalate to the detriment of global growth. However, earlier this week the markets rallied on the back of comments from the Trump administration and reinforced by various commentators and leading investment analysts that a deal between the U.S. and China seems increasingly likely when they meet next month. An escalating trade war obviously remains a genuine concern but on the balance of probability many are anticipating a benign resolution.

A further plus in the big picture for the U.S. is corporate earnings which remain healthy. With more than half of the S&P500 stocks having reported earnings for the 3rd quarter, the results are “overall positive”. This from Blackrock “Recent equity market weakness is not a reflection of current earnings“.

With regard to Brexit, the markets seem to be pricing in that things could end badly. Evidenced by the recent fall in sterling relative to other currencies, notably the U.S. dollar, which supports the strategy of holding non-sterling-based assets. Were this to happen many predict that the Bank of England would cut interest rates in an effort to stave off an economic recession. Holding, as we do, a significant UK bond exposure, theoretically a cut in interest rates would benefit this asset class and we are already seeing evidence of strength within the bond element of your portfolio.

With the U.S. mid-term elections looming, volatility is likely to remain high and there is no doubt the short-term price trend of the markets has turned lower with the U.S. market breaking below the Support levels we identified in the last post. However, as we write the market is bouncing back towards those important levels (which are now technical Resistance) and if they can be recovered we would assume some strength is developing in which case we would look to redeploy some of the cash we have raised recently.

Disclaimer:  ‘Where the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. The information contained within this communication is believed to be reliable but Realm Investment Management Limited does not warrant its completeness or accuracy.

This communication is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell investments.