October 2018 Market Commentary

November 2, 2018

By Jan Faure

October lived up to its reputation of being a month where markets can slide. Following October’s broad sell-off, the majority of global indices are in negative territory year to date, many with double digit losses.

The US temporarily dipped into negative territory year-to-date, only to be saved by a bounce in markets on the last two trading days of October. October’s sharp decline in markets was led by the US so it is there that we look for the reasons why.

Despite positive economic data out of the US, such as strong GDP growth for the third quarter, markets have focused on the impact that interest rate hikes may have on future economic growth. Even positive earnings out of US companies for the third quarter have been disregarded, with investors instead taking the view that earnings may have peaked. A number of US companies have also mentioned that foreign trade issues may dampen their future profitability.

While the US Fed continues with its tightening monetary policy, one must remember that the Fed is very much influenced in its decision making by economic data (i.e. “data-dependent”). This data has to date been supportive of rate hikes. The market, on the other hand, is starting to factor in what it sees as the Fed hiking rates too far, and the impact that may have on the economy a year from now.

Other prominent concerns, many of which have been present for some time, include Brexit, the looming end to QE in Europe, weak emerging markets and US-China trade relations.

November sees Americans go to the polls to vote in their midterm elections. The outcome will have a major bearing on the next two years of politics in the US. Since 1962, every year preceding the midterm election the S&P 500 Index has declined, with the average fall being -19%. The positive news is every year following the midterm elections the S&P 500 has risen, with the average increase being 30%.

The reason given is that markets are generally spooked by political uncertainty. Uncertainty is probably the biggest drag on markets in general. October’s correction is testament to that.

Our house view is to focus on the things we know. Our portfolios are built for long-term superior risk-adjusted returns. Our portfolio construction and our selected platform are in place to ensure that fees do not erode returns over time.

2018 has been a year to forget for global investors. As it stands it is only US indices showing meagre returns year-to-date, all other major markets are in the red. On a positive note markets are showing value which bodes well for the year ahead. We certainly will welcome a Christmas rally to salvage something for 2018.

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