Three reasons why we’re not in a bear market
October was certainly a volatile month for investors. Share markets globally fell between 6% and 7% in total return terms. Australia had the worst monthly outcome since August 2015.
But if you measure the falls from highs this year to recent lows the retreat has been even bigger. The average decline for global shares has been around 10%.
From its peak in late August, the S&PASX200 fell almost 11%. Emerging markets were hard hit, down around 20%, with China’s stock market slumping 30%.
Thankfully a bit of good news at the end of the month meant share markets have bounced around 3%.
The question now is, have we seen the bottom in markets?
We think it’s too early to say given various risks and so another bout of volatility remains possible. However, there are several reasons to believe that there is a good chance that markets will be higher in two months, six months or 12 months. In other words, I think the recent rout is likely a correction or a minor bear market within an ongoing bull market.
1. A bull market correction
The first reason is that for a major bear market to develop, where markets fall 20%, and the following year are down another 20% – as happened in the global financial crisis – you really need to see the US economy going into recession and dragging the rest of the world down with it. At the moment there is no sign of that happening.
2. Rates remain low
The second reason is that we’re in a world of relatively low interest rates. Yes, the US Federal Reserve is raising interest rates, but they have a long way to go before you could say interest rates are painful. And other countries are still a long, long way from raising interest rates. If anything, countries like Australia may still engage in monetary stimulus.
3. Normal volatility
The final reason is purely technical. We often see weakness around October. It is known as a volatile month. The good news is we typically rally into the end of the year and that strength continues into the early New Year. So, what we have seen in October is typical of seasonal volatility we get around this time of the year. It usually starts around August and September, but this year it started a little bit later in October.
Not the start of a major bear market
A number of worries triggered the recent sell-off, including US inflation, rising US rates, the China/US trade war, and concerns about emerging markets and Europe.
A lot of those worries still exist and markets could still have another leg down, retesting the lows we saw a few weeks ago. But I don’t think the recent sell-off represents the start of a major bear market. For that to develop we’d need to get a bit more negativity on the US economy and at this stage the US economy still remains pretty strong.