After a benign start, stock markets began plummeting across the globe. Towards the end of October – a month of ill repute in the stock market – leading markets were down eight to ten per cent. The last couple of days offered some relief, salvaging a couple of percentage points, but hardly sufficient to allay investors' apprehension.
International debt markets painted a similar picture. Both in Europe and the US, high-yield spreads shot up by more than 50 basis points, having already risen quite a bit over the past 12 months.
Gloomier days ahead, or just another case of collective market jitters?
“The stock market has forecast nine of the last five recessions.”
As you probably know, the market is good at spotting imminent threats – whether real or not. As the late Paul Samuelson once said, the stock market has forecast nine of the last five recessions. Oftentimes, anxiety feeds on itself.
You can never be sure, though. Might October in fact be a foreboding of something nasty?
Well ... I'd say available facts and figures rather indicate that both stocks and bonds have simply become a bit cheaper. Here are some highlights from last month's array of figures:
- Earnings estimates for fiscal year 2018 were adjusted ever so slightly downward, but 2019 estimates were generally raised by just as much or more.
- Global GDP estimates were unchanged, with a minor increase for the US offset by somewhat lowered expectations for China. There is little market guidance in growth estimates, but at least they do not pull the rug out from under the earnings estimates; there is consistency.
- Yields on ten-year government bonds, generally expected to fall if markets were to expect harder times to come, rose in the US and fell a bit less in Europe.
In financial markets, there is never a clear conclusion. You could easily load up on a a variety of facts and figures that point in either direction. That, after all, is the normal state of affairs. There is a reason why some people want to buy and some people want to sell at the very same time.
History, however, has taught us that pessimism brings few rewards in the stock market. It is hard to find evidence that October provides grounds for believing otherwise.