Q3 2018


John Butters, Chief Investment Officer

The third quarter of 2018 has ended, and already it is forgotten. Global equities returned 5.7%, bringing their year-to-date return to a creditable 8.2% to the end of September, but the focus of market commentators has been the subsequent fall in October: 5.6%, wiping out the third quarter’s gains (all data are from FE Analytics). Long-standing readers will know that I like to put market falls in their historical context. Monthly falls of 5.6% or more in global equities have occurred 27 times since January 1988, roughly once every 14 months. In that context, October was unpleasant, but nothing special.

It is often hard to pin down exactly what market participants are worried about when things get choppy. My reading of the situation is that people are worried about a recession in the USA. US stocks have driven the recent global rally, on the back of strong company earnings and fiscal stimulus from President Trump’s tax cuts. But the Federal Reserve is raising interest rates, and some economists are predicting that there will be a recession in 2020 on the basis that the stimulus from tax cuts will have ended by then, and interest rates will be high. If that happens, it will be a case of the Fed “taking away the punch bowl just as the party gets going” and creating a classic recession – one that is caused by the central bank in order to prevent the economy from overheating. That sounds like an unfriendly environment for stocks, but as I pointed out in our last report, economists are very bad indeed at predicting the economy. A lot can happen between now and 2020. Moreover, classic recessions are not necessarily as bad as one might imagine. Looking at US market performance from 1 year before each US recession through to its end, the market was down 3% in dollar terms at its worst point in 1979-80, 12% in 1981-82 and 8% in 1989-91. It has taken big, bad events like the global financial crisis to create really big market declines. Patches of market volatility can cause us to fear the worst, but it is important to remember: it is really very rare that the worst actually happens.


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