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Market Commentary - November 2018

23rd November 2018

October was a difficult month for global equities, with the MSCI World Index falling 6.8%. The US market, which has been driving returns this year, gave back the most, with the Russell 2000 (small capitalised firms) and NASDAQ (tech index) falling 10.9% and 9.2% respectively. Meanwhile, the FTSE All Share fell 5.2%. Gold, which tends to move inversely with equity markets, was up 4.1% for the month. Year to date, the MSCI World Index is now roughly flat.
Sentiment soured significantly during the month, and investors have several concerns to grapple with. The US economy continues to perform well, giving further credence to the Federal Reserve and its rate-raising agenda. Higher than anticipated US wage inflation provoked a late-September rise in the 10-year bond yield. With each interest rate hike in the US – the next one is anticipated for December – the markets adjust their risk-free rate and companies that have been reliant on a low cost of capital are exposed. Each time the cost of capital rises, the market digests and adjusts, and more companies are exposed. At a certain interest rate level, contagion may be triggered, thus prompting the end of the cycle; hence why good news about the US economy is being interpreted as bad news for global markets.
Combining the above with the ongoing trade war rhetoric that shows no sign of abating and a Brexit deal that is precariously placed, and one can see the rationale behind the changing sentiment. Earnings in the US this quarter have been robust if not good, but future guidance from management has been cautious, which has been taken poorly by investors. It may be that corporate the tax cuts which helped fuel the market in the first quarter are starting to wear off.
Market participants characterised 2017 with the term ‘Synchronised global growth’, while ‘Can it get any better?’ was widely used to sum up early 2018 – referring to the combination of cheap money, tax cuts and good corporate earnings. It is too early to assess how late-2018 and 2019 might be typified, but many are stating that this is a reversion to mean for GDP, with estimates falling from between 3% and 4% to 2%. This is certainly not recessionary (yet), but any slowdown in conditions affects investor attitudes. 

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