Correction in the markets
The world's stock markets reached new heights at the end of September, but there was a negative mood swing once again in October.
For the month as a whole, the US S&P 500 Index fell by 6.8 per cent measured in USD, while the European Stoxx 600 Index dropped by 5.5 per cent measured in EUR and the Nordic VINX Index ended the month down 6.7 per cent measured in NOK. In Norway, the Oslo Stock Exchange (OSEBX) saw a decline of 5.2 per cent.
Weighed down by the interest-rate hike
Not unlike the correction in January and February, the sharp interest-rate rise just before the fall was blamed for triggering it. The tighter monetary policy worldwide and not least in the USA has pushed interest rates up further. This, combined with a more mixed global macro picture and the continued fear of a trade war, has made the financial markets more vulnerable. The market also now acknowledges that the US growth momentum will probably reverse once the effects of the strong tax cuts ebb away. At the same time, economic conditions are still favourable in the USA and, now that the third-quarter reporting is over, companies can continue to buy back their own shares, which has been an important supply of liquidity to the stock markets.
Monitoring the USA
A recurring concern is that the US central bank (Federal Reserve) is raising the interest rate by so much that it is choking economic growth. Although the chair of the Federal Reserve, Jerome Powell, has the power to do so, the Federal Reserve is unlikely to go so far with the aim of derailing the economy. However, this is a very difficult balancing act.
The trade war between the USA and China has also been viewed as a source of weaker growth prospects. Many people expect the G20 summit later in November to be an arena where the next step will be taken. Following Trump's tweet in early November that the talks between him and China's leader Xi Jinping are progressing nicely, there may be an improvement in sight. Some people say this is just a game connected to the upcoming midterm elections in the USA. If the Republicans lose control of the House of Representatives, Trump's tax cuts to stimulate the economy may be reduced.
As far as Europe goes, we are waiting for the European Commission to approve Italy's budget. The Commission demands that Italy must include in its budget greater repayment of its national debt than has been proposed. The Italian government, on its part, believes that the way in which it proposes to spend money is crucial for increasing the country's economic growth.
The road ahead …
The stock exchange unrest in October was yet another reminder that those who invest in stocks and funds must tolerate fluctuations. Here in Delphi Funds, we believe that the economic cycle have more to give. This should also have a positive effect on the stock market.
"Controlling President Trump seems incredibly difficult"
James G. Stavridis