With no evident catalyst, this past week proved to be a quite messy one for equities. Though the week ended calmly, there was heavy selling for much of the week, though not selling characterized by anything resembling panic or intense volatility.
As usual, there were various theories and explanations, ranging from rumors of harsh Russia reprisals against western sanctions to further anticipation of interest rate rises in the U.S. to questions about China’s growth trajectory and the Beijing government response. The week was also capped by the surprise announcement that one of the most influential bond managers in the world – Bill Gross of PIMCO – had decided to leave his longtime firm. While not a market-moving event in itself, it certainly caught the attention of the investing community.
Earlier in the year, there was frequent chatter that equities were going up too much too quickly. Now, however, with nearly three-quarters of the year passed, we are facing a very decent but hardly excessive year of returns in the high-single digits. Of course, markets might well stage a strong fourth quarter rally. If anything, the fact that indices have barely budged in the past months makes such a rally more credible, not less. Much will depend on fourth quarter earnings and general sentiment.
Similarly, the early year chatter about the coming volatility in bonds has not come to pass. Yields on the U.S. 10-year have been trading in a very narrow band between 2.50% and 3.00% for much of the year. Traders can certainly make money on the basis point moves, but yields remain low and not especially volatile.
There have been several periods of equity surges and sell-off. The first week of August was notably negative, followed by weeks of gains. Much of September was quite strong, followed by this week of sell-offs. It is hard to discern an evident pattern here. Overall, the earnings, revenue and economic picture domestically continue to improve, while the global picture is somewhat more ambiguous.
In short, the trend of gradually rising stocks and static interest rates with a slight bias to the upside remains in place. We all know that multiple factors could alter that trend, but it will take more than a discombobulating week.
