For over two months now financial markets have pushed aside August’s concerns about global growth, trade wars, and geo-politics.  At the time of writing Australian and US markets are back to near the record highs of July 2019.    And the really interesting bit these days is there seems to be as many indicators and markers foreshadowing a market correction as there are cautiously predicting the bull run to continue for some time yet.     

What’s the answer?  Do you sell down some growth investments and wait for a crash or do you prepare to ride it out and potentially invest more when the inevitable correction comes – and will that be in one week or one month or one year? 

Well, while market conditions change all the time, there’s a couple of things that don’t change and the answer is that this will vary from person to person based on circumstance, and based on investment objective.   

On the downside, globally:  soft growth; low inflation despite low interest rates; high debt levels; little likelihood of further reductions in already-low unemployment numbers; indications that the US manufacturing slowdown is also shifting into the Services sector; heightening geo-political issues.  And all this while markets sit at or near record highs.

Countered on the upside by a view held by some that: low rates will continue to support equity markets – with low interest rates set to prevail for the foreseeable future investors will continue to seek better returns from shares; rapid technological innovation and Asian growth will continue to underpin the outlook; excesses that were present pre-GFC like overspending and surging inflation are not present now; if geo-political hotspots or issues are resolved then a relief rebound could be seen.     

So there are these competing forces and opinions which, if nothing else, create heightened volatility.  To illustrate a couple of examples, the September reading for the US ISM manufacturing index fell to 47.8, which was its lowest level since mid-2009. The export orders component of the index was particularly weak, confirming the impact of the US China trade dispute on economic activity.

On the same day, the market learned that employment growth in the US in September was also softer than expected, but still the fact that 136,000 new jobs created in the month was a good result. And further, the US unemployment rate held at 3.5% without any sign of accelerating wages growth.

Elsewhere in the world, German factory orders in September were very weak, but China’s September manufacturing PMI improved to its best level in 19 months.     But it was also reported that China’s real GDP growth slowed to 6% in the third quarter, which was a little weaker than had been expected. This reflects slowing spending on consumption and infrastructure.

Political developments:  There were some interesting developments on the political front in October:

–       In the US, Elizabeth Warren is moving closer to taking the lead in the race for the Democrats’ Presidential nomination. Previous favourite Joe Biden is slipping in the polls because of his connection to the Ukraine affair, as well as some lacklustre performance in recent debates. Senator Warren’s polices include some seriously anti-big business measures which would undermine sentiment in the equity market.

–       In the UK, Parliament failed again to resolve the Brexit impasse and the EU has agreed a three month extension to sort something out. Boris Johnson has secured an election on December 12 to break the logjam. So far, the polls favour the Conservatives, but the fragmented nature of UK party politics make the outcome hard to call.

–       In Argentina, the Macri government has been replaced by the socialist Fernandez government in a reaction against Macri’s austerity policies. The authorities immediately imposed controls on foreign currency holdings in an effort to help protect the value of the peso. Violence flared in Chile as students protested an increase in subway fares. Bolivia, Peru and Ecuador have also seen protests against austerity measures and political corruption. Meanwhile, the protests in Hong Kong have also continued in an escalated fashion.

Other Sources:  MLC, Quilla Consulting, RBA.