On the latest edition of Market Week in Review, Adam Goff, managing director, investment practice, and Rob Cittadini, director, Americas institutional, discussed possible factors behind the recent sell-off in global equity markets and what the road ahead may look like for investors.
Is a bear market beginning?
The stock market was pummeled in a two-day stretch from Oct. 10-11, with major indexes tumbling across the globe. This has led many investors to wonder if the much-anticipated beginning to the next bear market is underway. Goff's answer? Probably not.
"The recent downturn looks a lot more like the market correction that occurred in early February, following January's peak in equities," he stated. Looking at market moves so far this month, stocks appear to be retracing - or walking back - some of the excessive gains from the third quarter, Goff noted. Case in point: U.S. large-cap equities, as measured by the S&P 500® Index, were up approximately 7.5% last quarter, and are now down roughly 6.5% in October. Likewise, global equities (as measured by the MSCI World Index) advanced roughly 5% in the third quarter, and have now retreated by roughly the same amount.
"Essentially, we're seeing the market re-thinking its excitement over the past few months," Goff said, "with investors now realizing that perhaps there's more to be concerned about, especially in regard to the forward-looking economic outlook."
What drove the market plunge?
What factors behind the scenes may have led to this shift in thinking? Looking at the actual news from the week of Oct. 8, nothing in particular happened that should have triggered such a steep sell-off, Goff said. For instance, the release of the U.S. Bureau of Labor Statistics' Consumer Price Index (CPI) for September showed a 2.3% increase, year-over-year. While that was slightly below consensus expectations, it wasn't enough to set off a firestorm of concern, he remarked.
In Goff's mind, in order to really assess what happened in markets, it's best to take a step back and look at things from a broader perspective. Last year was an extraordinary year for markets, he said, with stocks consistently churning upward. Ever since this year's January high-water mark, in Goff's opinion, a very different sort of market environment has set in, "a push-and-pull between concerns about how high interest rates will climb, when inflation will become a problem and whether trade tensions between the U.S., China and other countries will impact economic growth rates."
These issues have all surged to the forefront in the past few weeks, Goff said, likely indicating that the remainder of 2018 will be plagued by higher volatility across markets. While there will be a bear market at some point in the future, he reiterated that the recent slide is likely not indicative of its beginning.
Is volatility here to stay?
As for what the road ahead may hold for investors, Goff said it's important to assess markets in terms of cycle, value and sentiment. When examined under these three lenses, he and the team of Russell Investments strategists don't see the overall picture today as looking much different from a few weeks ago.
- In terms of value, equities still remain very high, especially in the U.S., Goff said. "Across the globe, stocks are at levels from which we don't expect explosive upside," he said.
- Turning to cyclical factors, he said that a tug-of-war remains between concerns over a flattening U.S. Treasury yield curve and rising interest rates versus continuing robust economic data in the U.S. and many other regions of the globe.
- In regard to sentiment, Goff said that he and the team of strategists don't view the U.S. equity market as fully oversold yet, as they don't think it's quite poised enough for a big upturn. "We do feel that the S&P 500® Index's dip below its 200-day moving average represents a point at which some investors who've been underweight U.S. equities may want to consider getting back in," he stated. U.S. Treasuries may also be a little oversold, Goff added, due to the sharp spike in the 10-year yield the week of Oct. 1.
All things considered, Goff expects to see continued volatility in the weeks and months ahead. The main takeaway, in his opinion? "Now is not a great time to be taking lots of risk, given historically high valuations and the late-cycle phase of the market." That said, Goff concluded that he and the team of strategists at Russell Investments will be looking for opportunities to exploit market weakness in the days ahead.
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