The month to 26th October was a torrid month for stock markets in general.

 

The US S&P fell by 9%, UK FTSE by 8%, German Dax by 9% and the MSCI World index by 9%. So it is no surprise that the SA All Share index also fell by 9%. There has been a correction over the past week with markets ticking up around 2%.

 

What caused this to happen? It is always difficult to pin down an exact cause, but our reading of the investment analysis we receive points to a few factors.

  • US investors started worrying that share prices are too high after the Fed’s opinion that interest rates are not yet at normal levels, which implies further hikes in the year ahead.
  • The US earnings results for the quarter were disappointing.
  • The Trump trade war continues to unsettle investors.
  • The US sanctions on Iran from next week could cause an oil price spike which would be bad for economic growth.

 

So it seems that the correction was US led, triggered by these concerns. It seems to be a normal bull market correction, with top analysts in the USA sharing the view that the US market is not yet expensive and has some way to go before it runs out of steam.

 

A side effect of all this is that emerging markets, led by China, have been hit particularly hard as

  • Investors in the developed world withdrew money to reinvest in their domestic shares and interest-bearing investments.
  • The impact of the trade war has tempered growth prospects.

It seems however that the bearish sentiment has been overdone, particularly with the Chinese announcing stimulus measures.

 

Looking at share portfolios that clients are invested in as well as equity unit trusts, the results have been consistent, with all players falling by between 7% and 9% over that period.

 

What to do? Our advice is that, uncomfortable as this may be, to sit out the market volatility, as we believe there is more upside that downside at current prices. Selling now when prices are low would lock in losses. It also supports our often-expressed view that it is pointless trying to time the market. Who could have predicted a 2% increase in share prices over the past week?

 

MSCI World (3)