October 31, 2018

A correction, not a bear market (yet)

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In Short

It is easy to get pessimistic considering the political and policy headwinds behind the nasty market correction in October. The Fed, trade war and Italy/EU standoff will keep volatility high. Fed normalization was always going to shock both volatility and the bond-stock correlation. We see the recent sell-off as yet another, if more severe, warning that there aren’t many places to hide at this stage of the cycle. But it is a correction, not the start of a bear market. Global growth isn’t crashing.
A correction, not a bear market (yet)
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Investors entered the autumn with great anxiety about the trade war and Brexit. Those risks have abated, and so have flight-to-quality flows. Headline risk into yearend includes trade war news (US, China, EU) and soft US employment data. Yet we don’t see those derailing market trends.

Highlights:
  • It is easy to get pessimistic considering the political and policy headwinds behind the nasty market correction in October. The Fed, trade war and Italy/EU standoff will keep volatility high.
  • Fed normalization was always going to shock both volatility and the bond-stock correlation. We see the recent sell-off as yet another, if more severe, warning that there aren’t many places to hide at this stage of the cycle. But it is a correction, not the start of a bear market. Global growth isn’t crashing.
  • We remain positioned for a further rise in yields (more so in South Europe), still prefer cash and favor a moderate overexposure in ‘value’ equities.
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A CORRECTION, NOT A BEAR MARKET (YET)

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