After an ugly October, the question most investors are asking is “was that the low?” While its too early to know, investors need to remember that market corrections and volatility are normal, and we were long overdue for a pullback.

All through the summer, risks had been building in the equity markets thanks to higher interest rates and increasing global trade tensions. In October, the market finally gave in after hearing comments from Federal Reserve Chair Jerome Powell reiterating his hawkish stance and signalling more rates hikes. One of the biggest risks to the global market is rising rates in the face of slowing economic data.  After many years of the “Fed put,” where investors felt that anytime the market suffered a setback the FOMC would save the day, we are now realizing the markets are on their own.

So, after a month in which we saw many global markets go negative on the year, even while companies were reporting good earnings numbers, its important to get a sense of what events we should be expecting for the balance of the year and what they could mean.

The US midterm elections are coming on November 6th and just getting past that date should be a positive. The toxic political environment in the US ahead of these elections has been weighing on investor sentiment and we should see some recovery once its over. The most likely outcome appears to be a Democrat House and Republican Senate. A split congress has traditionally been bullish for equities and, in this case, could reign in some of President Donald Trump’s more radical plans.

If Trump is to suffer a setback, it could force him to back off some of his more severe trade demands, potentially leading to a positive resolution with China. Trade peace with China could be enough to kickstart global growth and offer support to the beaten down commodities sectors. There is a G20 meeting on November 20th where Trump and Chinese President Xi Jinping will meet; watch for positive comments from this event.

The biggest headwind to extending this bull market will be the FOMC. The saying goes, “bull markets don’t die of old age, they get murdered by the Fed.”  Economic data through the month will be carefully analyzed for signs of inflation. If wages and consumer prices continue to accelerate, it will be difficult for the Fed to back off of their hawkish tone. However, if the data were to moderate and the American market settled in to a period of moderate growth, the Fed could back off and the cycle could be extended. We are almost in a period where bad news is good news.

For the next few weeks, watch how the market reacts to these events. If all goes well, we could be setting up for another run higher into year end. But, the all clear hasn’t been called yet. A further move higher in rates or a collapse in the US-China trade talks and October may have signaled the end of this bull market.

 

–Greg Taylor, CFA and lead portfolio manager

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