It was a difficult month for equities in October, for some bringing forth memories of former Octobers like 1929 and 1989. However, the circumstances of loss in stock values today are much simpler, and predictable:
- The losses from decades ago occurred almost instantly and without warning. In October 2018 the losses can be attributed to several, well understood conditions.
- The long-term U.S. bond rate, and short-term interest rates there, and in Canada, are on the rise. Previously the lack of returns on interest-bearing instruments pushed many to pursue gains in equities. Now that interest rates are rising, money is leaving equities to pursue interest income and to rebalance portfolios.
- There are several political situations that could affect markets overall. This has facilitated a flight for some to safe-haven investments like gold and U.S. dollars. Gold was the lone advancing position on the grid (above), and since our grid represents a falling Canadian dollar, it means that the U.S. dollar rose against ours.
- The losses of 6½%, 7%, 5% and 9% for the TSX, S&P 500, Dow and NASDAQ, respectively, are the largest monthly declines in several years. In January 2016, the losses were similar, but not quite as large, and only for the U.S. indices. October 2018 was a month when equities lost significant value.
- Notwithstanding these losses, American corporations and their reported earnings have shown growth. Although, the size of the growth may be slowing, earnings are still increasing. Additionally, the employment reports have also been favourable.
- The losses in the equity markets appear to have been tempered by this positive news. The losses and the presence of positive news demonstrate the strength of the magnetic pull for capital toward rising interest rates and bond yields.
The major North American indices are graphically represented, first as the month of October and then Year-to-Date 2018.GRAPH 1
- The NASDAQ was the big loser for October, losing value from the beginning of the month, and ending off by 9.20%
- The TSX fulfilled its typical role as a tempered index compared to the U.S. by finishing in the “middle of the pack”.
- A slight uptick at the end of the month prevented an even more dire set of results from occurring.
- Despite its October losses the NASDAQ leads North American indices with YTD returns of nearly 6%, and 1-year returns of 8½%.
- For 2018 the TSX (black line in adjacent graph) has been middle of the pack in the middle of the year, beginning and ending YTD far behind its American cousins.
What’s ahead for November and beyond?
Expect three influences to affect markets over the short-term; the results of the U.S. midterm elections that could change the balance of power in Congress, interest rate and bond yield increases that would lower equities values should they occur (and all else remains static), and political intrigues particularly with the U.S. and its trade actions, dealings with Saudi Arabia and Europe
Image 1: Stock exchange source: https://www.bloomberg.com/markets
Image 2: Advisor Research Group Inc. and data supplied by https://www.bloomberg.com/markets/stocks
Article Source: Advisor Research Group – Market Update 10.31.2018