Seasonality can be an important theme in the markets, and October can often prove to be a tricky month. This particular October joins a much broader roll call of bad months for global markets. Here’s a look back at how the story unfolded and what it means for markets over the weeks and months to come.
World stock markets lost 7.8% in US dollar terms over the month, based on the broadest measure of global equity performance1. At one point, global stocks were down 10%. October 2018 ranks as the 22nd worst month for stocks since 19702, in the bottom 3.8% of all months.
Coincidentally, the two worst months on record were also in October (1987, 2008) although August and September have more commonly seen the majority of large declines.
Notes on a tough month
There were some notable points that emerged as the markets endured such extreme volatility.
- The US S&P 500 index gained or lost greater than 1% in a single day 10 times in October, two more times than the whole of 2017
- Brazil was the only equity market to make gains (+18%), due to the election of President Bolsonaro, promising economic reform, in contrast to Mexico which lost 18%
- Hong Kong was the worst developed market (-10.9%), Switzerland the best (-1.6%)
- Big tech stocks suffered notable declines, with the Nasdaq index down by 9.2%; share prices of Amazon and Tencent fell by 20.2% and 17.4% respectively
- US tech stocks are now trading on a lower valuation than utilities based on projected earnings, despite very rapid sales growth in tech compared to utilities
- US bond yields rose slightly over the month, while gold prices rose 1.9%
What caused the sell-off?
As we wrote earlier in the month, comments from US Federal Reserve Chairman that the Fed ‘may go past neutral’, in effect saying that they would raise interest further than expected by the market, had led to higher bond yields.
At the same time, expectations for economic growth appear to have declined somewhat, even though current US growth indicators have remained robust.
In short, neither the small rise in bond yields nor the reduction of growth expectations appear significant enough to prompt such a big fall in global stock markets.
There are also some of things that we observe which are important.
- There has been a lot of ‘crowding’ in ownership of top US technology stocks, when analysts still seem very optimistic (margins are continuing to expand)
- Some technology stocks look ‘priced-to perfection’, so any small disappointment can have a big effect: even after the large share price decline Amazon is priced at 44 times forecast earnings in 2020
- Hedge funds look to have been the largest losers in October, with the average US equity long-short fund down 10% last month (according to Goldman Sachs), suggesting quite a lot of selling pressure from these short-term investors
- A variety of technical indicators suggest quite extreme risk aversion amongst investors, which typically are contrarian indicators: when everyone is fearful, stocks can rebound strongly.
Overall, we think the sharp sell-off in October looks more technical in nature, rather than due to a change in the long-term outlook for global stock markets.
There are some positives to take forward
Looking to the rest of the year and beyond, there is cause for optimism. Sales and earnings are growing strongly in the US: third-quarter earnings from 77% of US S&P 500 have beaten estimates, with earnings on course for 26% growth over a year ago, and a further 10% growth is forecast for 2019.
Moreover, global equity markets now look cheap compared to the long-term: global developed equities are trading on 14.4 times forecast earnings over the next 12 months, compared to the long-term average of 16.4 times. Excluding the US, equities are valued at 12.5 times, the lowest valuation since June 2013, while emerging equities are trading on 10.2 times forward earnings, the cheapest since May 2014
On balance, we don’t think the outlook for global markets should be entirely clouded by the poor performance seen in October. Your portfolios remain positioned to make the most of the opportunities that emerge, and we’ll continue to track them closely over the coming weeks and months.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past and future performance indicators are not a reliable indicator of future performance.
Sources in commentary: Bloomberg
Other sources as indicated
- MSCI All-country World IMI (Large, Mid & Small-Cap)
- Based on MSCI World Total Return 1970-1987, MSCI AC World 1987-1993, MSCI AC World IMI 1994-2018