Volatility returned to US stocks in October, providing a reminder of the benefits of diversification at both the asset class and sector level.
Major US indexes flirted with correction territory before rebounding in the final two days. International stocks, which were already having a difficult 2018, neared a 20% decline from January highs.
The cause of market corrections is often difficult to attribute, even in retrospect. We believe two speeches early in the month helped accelerate selling pressure. The first was from Fed Chairman Jerome Powell who said that interest rates are a long way from neutral, and that we may go past neutral. This wasn’t new news, but after a decade of a very accommodating Fed under Bernanke and Yellen, it was a wake-up-call that we are in a new environment for monetary policy. The second was from Vice President Pence who painted an adversarial picture of the relationship between the US and China. The implication is that the trade war will persist or perhaps intensify. We’re cautiously optimistic there will be progress on trade at the G20 meeting later this month, but a quick fix remains unlikely.
Meanwhile, earnings growth continues to be robust and the economy is chugging ahead. Earnings haven’t all been rosy, however, as investor favorites Amazon and Apple offered disappointing guidance, sending tech shares lower. In the US, the sell-off in stocks was sharp and came out of nowhere. That is typically more characteristic of a correction rather than the start of a bear market. Thinking globally, however, stocks have been generally in a flat or downward pattern since the end of January.
It is impossible to know where markets go from here, but recent market activity has served as a reminder that investors should be aware of their allocations and the drivers of risk in their portfolios.