Markets slump as the central bank liquidity flood recedes

“My, my”, says David Rosenberg of Gluskin Sheff. “The president hasn’t tweeted about his effect on the stockmarket since 3 October.” Like all investors, he’s had a nasty fright. The past few weeks have not been “as cataclysmic” as October 2008, 1987 or 1929, says Randall W Forsyth in Barron’s. “But bad enough.”
By mid-week, America’s S&P 500 index had slipped by more than 8% in October and was heading for its worst month since February 2009. In just five weeks the index has fallen by more than 10% from a record peak, and this week it entered negative territory for the year. A decline of that magnitude defines a correction, a 20% slide means a bear market. The Nasdaq Composite index slumped by 4.4% last Wednesday alone, its worst day in seven years.
US stocks rejoin global trend
Stocks outside the US have been struggling for some time. A FTSE index covering global stocks but stripping out the US has fallen by 14% this year. The latest bout of selling on Wall Street undermined confidence elsewhere, too. The pan-European Stoxx 600 is at a two-year low. The MSCI Asia ex-Japan index has fallen 23% since January, dragged down by China’s bear market (see box, right). The FTSE 100 has lost all the gains it made this century.
Storm clouds gathering
Several immediate worries, along with a major structural shift, explain the frenzied selling. The trade war between America and China is beginning to hamper the performance of US industrial blue chips – Caterpillar and 3M warned that tariffs on Chinese imports were raising their costs. Meanwhile, many fund managers see the German economy “as a proxy for world trade”, notes Ian King on Sky News. So investors concerned about the world trade outlook “will sell the German market above all others”. This helps explain the DAX index’s 18% decline this year.
We have hit peak earnings
Investors have also “latched on to the narrative that US corporate earnings have peaked and that the tailwind” from the Trump administration’s tax cuts will fade, says Michael Mackenzie in the Financial Times. Over the past decade the bull market in the US has been powered by the FANG stocks (Facebook, Amazon, Netflix and Google). Amazon last week delivered record profits of almost $3bn for the past three months, but revenue growth was slower than expected.
Google’s parent company Alphabet also missed analysts’ revenue expectations. This has prompted an exodus from tech, with the FANG stocks losing 14% this month. Amazon has shed a quarter of its value from a record high in early September.
“We’re going through this transition where, earlier in the year, the corporate earnings results were just a blowout and now they’re more mixed,” David Lefkowitz, senior equity strategist for the Americas at UBS Global Wealth Management, told The Guardian. A stronger dollar (half the S&P 500’s sales are made abroad) and a slower global economy will also cause a shift from a period of double-digit, year-on-year earnings-per-share growth to a far slower pace. Investors are also cottoning on to a new obstacle for margins and profits.

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