Thoughts from Monday: It’s October, is a market correction coming?

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OPINION: Many investors believe that global equity markets are expected to decline for a long time. Many also believe that the problems of the global financial system, laid bare by the latest crisis, have not been resolved since.

Corrections are part of the normal ebb and flow of the markets. Larger accidents like in 1987 or 2008 are relatively rare, although through a lens of several decades they are inevitable.

The US equity market is currently down 5 percent since early September and the New Zealand market is down 2.5 percent. Market volatility has also increased.

Before September’s weakness, the US market was expected to post its seventh consecutive monthly increase. Unbelievable.

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Despite a global pandemic, the U.S. market has doubled from its March 2020 low – one of the strongest 12-month gains in the past 75 years. It is also incredible.

It is not uncommon for September and October to be volatile months. They also witnessed significant falls – those of 1929, 1987 and 2008 all started in October. This fact, however, is not proof that we are heading for a “flash crash” anytime soon.

A short-term market correction is entirely possible, but a total market collapse seems unlikely, says John Berry, CEO of Pathfinder Asset Management.

Richard Drew / AP

A short-term market correction is entirely possible, but a total market collapse seems unlikely, says John Berry, CEO of Pathfinder Asset Management.

But you don’t have to search much for bad news. Economic growth is slowing down. Global supply chains are disrupted. Inflationary fears are on the rise – not helped by higher transportation costs, energy costs and wage pressures. Central banks have fewer effective tools to respond to the next crisis.

There are big risks in big economies. In the United States, President Biden is struggling to get his spending plans approved. Whenever a pullback occurs, there is nervousness that US traders who follow the trends and are guided by algorithms will accelerate the fall.

In China, regulatory challenges facing some business leaders have created investor uncertainty. The financial woes of Evergrande, the big Chinese real estate developer, are worrying.

Evergrande is unlikely to collapse uncontrollably, bringing chaos to the Chinese economy. But the management of Evergrande in China depends on the health of its banks, the stability of financial markets, continued economic growth, and investor confidence for both locals and overseas.

Asset prices, from real estate to fine art, have risen, as have corporate valuations.

Tesla is now more valuable than the next six automakers combined. AirBNB is worth more than the brick and mortar operations of the Marriott and the Hilton put together.

It's not uncommon for September and October to be volatile months, says John Berry.

Provided

It’s not uncommon for September and October to be volatile months, says John Berry.

Only four tech companies – Facebook, Amazon, Netflix and Google (known as “FANG” stocks) are more valuable than the entire Japanese stock market.

Despite the negativity and the evaluation questions, there are positives.

Consumers continue to have the capacity to spend. Huge amounts of liquidity are waiting to be deployed by private equity firms, global companies and investors in general. Interest rates remain incredibly low.

Business investment spending in the coming year will be strong. Significant sums will be invested in supply chain resilience, including spending on new technologies and automation.

Let’s try to balance these conflicting views and what it means for the market outlook. Are we witnessing another crash of 1987 or the collapse of the tech bubble of the 90s?

At present, a short-term market correction is entirely possible, but a total market collapse seems unlikely. For now, the fractured global environment remains favorable for investment.

But there are never any guarantees. Investors should remember that the evolution of the stock market can be like a technological breakthrough – it can happen quickly.

– John Berry is Managing Director of Ethical Fund Manager and Provider of KiwiSaver Pathfinder Asset Management, which is part of Alvarium Wealth.


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