Wobbly times

stock markets

Stock markets have started to wobble. A sell-off in Asia has spread across the globe. Having been talked about for months, is the sell-off finally here?

The catalysts for the sell-off are varied: certainly, the prospect of higher interest rates in the US is playing a role as the Federal Reserve seeks to cool an increasingly frothy US economy. The US is at or near peak employment and there appears to be little slack in the economy. This could be the tipping point where inflation pressures start to mount. Bond markets have certainly started to worry.

The fact that the problems started in Asia suggests that President Trump’s trade wars may also be a factor, with the IMF and World Bank both recently warning that it would hurt global growth.

equity markets should regain their equilibrium even if it takes a little while

A less exciting reason, may simply be that the bull market was long in the tooth. It had been fuelled by huge amounts of central bank stimulus, which is now being unwound. Stock market valuations looked high and something had to give. Markets are, after all, just giant collections of buyers and sellers.

There are other possible reasons. Concerns have been raised about China’s growth rate, particularly in the wake of US protectionism; the oil price is high and could move higher when sanctions on Iran’s oil takes effect.

For investors, the question is whether the sell-off will extend. It has generally been a dismal year for investors of all types and some will undoubtedly be wondering why they have hung on so long. The sell-off at the start of the year was reversed by the strength of the FANG stocks. It is difficult to see that happening again. Valuations in stock markets still don’t look compelling even after the sell-off.

There will probably be much in the press over the next few weeks about sitting tight and waiting for the turmoil to pass. That’s always good advice, of course, and equity markets should regain their equilibrium even if it takes a little while. The bond market, however, may be a different problem. If investors have assets in their portfolio that are supposed to be defensive and are seeing significant sell-offs, that could be uncomfortable. With bonds, it is also more difficult to regain what has been lost. This could be the real area of pain for investors.