Stock markets down!
Investors worry about US economic policy, interest rate rises and risks such as Italy, Brexit and an emerging market crisis.
Glass is half full: economic growth and third quarter corporate profits quite strong, risks should not be exaggerated.
Investment implications: correct ion seems to be exaggerated; we remain slightly overweight in shares.
The American stock exchanges experienced a stormy day yesterday with a loss of more than 3%, the biggest loss since February this year. The European stock markets were also down and since the beginning of this year have lost on average more than 8% and are therefore considered to be in ‘correction’ territory. Emerging markets, such as China, dropped even more, although this market has been in a bear market for some time now.
This stock market correction doesn’t come out of the blue. What are investors mulling over?
- The economic divergences between the US, Europe and the emerging markets have widened:
- US growth continues to accelerate mainly due to, but among other things, the Trump tax cuts.
- In Europe, economic indicators have been slowing for some time now.
- Emerging markets have been in an economic downturn since the beginning of this year: lower growth, falling commodity prices, political tensions (elections and the trade war) and the more expensive dollar weigh on economic confidence.
- The fear that America will start to grow too quickly, and thus lead to an overheating economy and higher inflation, has increased. That translates into higher interest rates in the US. The Federal Reserve has already indicated that it will increase the policy rate more strongly, in order to let some steam out of the economy. Investors fear that this could lead to a recession.
- The third quarter results season is fast approaching. In some cases, analysts fear weaker results, especially on account of the trade war. Some of the lesser results and expectations already weigh on confidence in the technology sector.
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- Finally: politics. In Europe, the conflict between the new Italian government and the European commission on the budget weighs on investor confidence. The Italian stock market lost more than 20%, the interest rate differentials between Italy and Germany has increased to more than 3 percentage points, which brings back memories of the euro crisis. The absence of an agreement on the Brexit does not reassure investors either.