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Waiting for Godot – how long until markets recover?

5 December 2018

It had been hoped that the US midterm elections on 6 November might prove to be a cathartic moment for markets and provide a positive turning point following the brutal October battering.

Unfortunately, conditions remain challenging and sentiment is fragile. In performance terms, the S&P 500’s 9.1% decline between 30 September and Thanksgiving is the third worst showing for this particular period since 1950. While the falls are nowhere near those experienced in 1987 (-24.2%) and 2008 (-23.9%), this volatility remains deeply unsettling.

As you would expect, we have spent a considerable amount of time re-examining our investment strategy to assess whether adjustments are necessary. Our conclusion remains that now is not the time to make significant changes and, unlike the protagonists in Samuel Beckett’s Waiting for Godot who wait endlessly and without success, the ‘Godot’ of a market recovery will eventually appear.

Our positive belief stems from a number of sources, although we concede that some market concerns may not be resolved in the short term and it is possible the current period of volatility may persist into the first quarter of next year.

So, what’s holding up the market recovery?

Interest rates

The primary market fear at present seems to stem from the US Federal Reserve (Fed) who, even in the face of current market conditions, are likely to have raised interest rates four times in 2018, and are set to hike further in 2019. However, we view it as entirely possible that the Fed will pause next year, and we were particularly comforted by Chairman Powell who recently likened raising interest rates to moving around in a dark room, especially when you have no shoes on. In this scenario, you move slowly to avoid stubbing your toe.

Inflation

While policymakers continue to closely scrutinise inflation – as we anticipated they would do in our 2018 investment themes published this time last year – it remains of little concern. While there are signs that price increases in certain areas are having a dampening effect on demand, this does not seem to be an environment where inflation expectations are likely to rise uncontrollably.

Oil prices

There has been a focus on the slump in oil prices which have fallen by 30% in eight weeks. The concern in some quarters is that this signals a pronounced growth slowdown is either underway, or imminent. While any forecasts on oil prices should be viewed with a healthy dose of scepticism, what is clear is that the price fall is due to a significant increase in supply rather than a demand deficiency, as over a million barrels of Iranian oil returned to the global market almost overnight. Further, the inflationary benefits of lower oil prices should not be forgotten, particularly as this may allow the Fed to take their hoped for pause for breath.

Trade wars

Meanwhile, the dinner between Presidents Xi and Trump at the G20 summit achieved broadly what was expected. A 90-day ceasefire is now in place, which was accomplished by the Chinese agreeing to purchase a substantial amount of US goods and negotiating further on issues such as forced technology transfers and intellectual property rights. In exchange, the US has agreed to postpone the increase in tariffs on Chinese imports. This is a truce, rather than a meaningful breakthrough, but the fact that both sides are committed to negotiating further is a positive development. Pragmatism could yet defeat idealism.

Company confidence

Finally, corporate fundamentals remain strong and ultimately it is earnings which matter to stock markets. Year-on-year earnings growth for the S&P 500 reached 23% at the end of the third quarter according to Bloomberg figures. While this pace of growth cannot continue indefinitely there are also few reasons to expect earnings to collapse in the near term, even with trade tensions in evidence. There are also signs that other governments have taken notice of the US fiscal boost from the tax cuts enacted earlier this year and are considering similar stimulus programmes.

Ultimately, we acknowledge that some form of catalyst may be needed to spark the market recovery and a revisit of October’s lows may be required. The possibility that this catalyst could be trade, interest rates or earnings related should not be discounted, no matter what the headlines might currently imply. We believe Godot will eventually arrive; he’s just running a little behind schedule.

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

The information contained herein is based on materials and sources that we believe to be reliable, however, Canaccord Genuity Wealth Management makes no representation or warranty, either expressed or implied, in relation to the accuracy, completeness or reliability of the information contained herein. All opinions and estimates included in this document are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information contained herein.

Photo of Justin Oliver

Justin Oliver

Deputy CIO

Justin provides direct assistance to the Chief Investment Officer in maintaining responsibility for the investment philosophy, process and methodology of Canaccord Genuity Wealth Management, and acts as the alternate to the CIO. He is Chairman of Canaccord Genuity Wealth Management’s Portfolio Construction Committee, a member of the Asset Allocation and Fund Selection committees and manages several of Canaccord Genuity Wealth Management’s Select range of funds. Justin is a Chartered Fellow of the CISI and is a former President of the Guernsey Branch of the Institute.


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IMPORTANT: Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

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