The steady rise in US equities came to an abrupt halt last week and caused tremors across global stockmarkets. Of late, the US has been one of the few markets to make any real progress fuelled by tax cuts, a strong American economy and, most importantly, good corporate results. The rest of the world (apart from Japan, which has its own set of special problems) has not been so lucky. Emerging markets in particular have had a difficult year. This is thanks partly to the strength of the Dollar, which has created havoc in countries such as Turkey and Argentina, but also to ongoing political issues, none of which have an easy short-term fix. Other regions such as Europe have struggled with below average rates of growth, whilst Brexit has frozen the UK economy and highlighted political economic illiteracy. None of this, of course, is new news.
A sudden setback to the one market which had been providing investors with proper growth is, therefore, cause for concern. The sell-off was reportedly triggered by remarks from the US Federal Reserve Bank that interest rates would rise consistently through to the end of 2019, and maybe beyond. This was also nothing new; the Fed has been predicting such rate rises for some time. However, rate hikes are typically deployed to cool an overheating market and control above-trend inflation, of which there is little evidence. But this is a moving target and the Fed may well slow down its ‘dot plot’ of predicted rate rises, all of which is entirely normal at this stage of the economic cycle. The market reaction was, therefore, curious in its severity. Certainly concerns over trade wars with China and other geopolitical storms won’t have helped, but there is clearly more going on behind the scenes.
Short-term, we expect this volatility to continue. Good third quarter results from corporate USA will steady nerves, as they did earlier in 2018, but it will take a little while for the market to decide whether the Fed’s cooling action is vindicated. Central banks do not have an especially good track record of economic forecasting and hiking interest rates to combat an imaginary inflation risk could simply push the economy into recession. There are, as ever, too many moving parts to present a coherent, confident argument for short-term share price action. Long-term, of course, history has shown that investing for the long term in quality companies remains the best way to create wealth. The latest correction is a reminder that this strategy is not linear and that prices can move either way, and very quickly.