Examining the causes of the selloff
Investors seem to largely be
reacting to concerns
about the possible escalation of trade wars between the U.S. and China.
First came the realization that the Donald Trump-Xi Jinping trade talks at
the G-20 meeting did not achieve the results that had initially been
reported. Then, later in the week, the arrest of Huawei’s chief financial
officer by Canadian authorities at the behest of the U.S. caused a
significant amplification of concerns that the U.S.-China trade
relationship would deteriorate. And now, with China summoning the U.S. and
Canadian ambassadors over the Huawei arrest and threatening formidable
action, I am not surprised to see risk assets are still down and Treasury
prices are up.
In the background, there are also concerns about a global economic
slowdown, which is causing a lot of nervousness and apprehension – and is
clearly contributing to the fragility of the stock market. It was reported
recently that Bank of Japan Governor Haruhiko Kuroda was questioning the
strength of the global economy, pushing Asian stocks lower. And we have
been seeing signs of a modest global slowdown – but not a recession – in
various places around the world. For example, third-quarter gross domestic
product (GDP) for Japan fell 0.6% quarter over quarter in the final
estimate, which was below consensus and well below the preliminary reading. 1 And eurozone GDP growth for the third quarter rose just 0.2%
quarter over quarter, compared with an average of 0.7% quarter over quarter
I also believe the November U.S. employment situation report has added to
the downward pressure on stocks and upward pressure on Treasuries. Not only
did job growth fall below expectations – striking a nerve, given
sensitivity to any signs of a global slowdown – but, more importantly, wage
growth remained relatively high, which could constrain the U.S. Federal
Reserve’s (Fed) ability to ease up on its plans for interest-rate
normalization in 2019.
Three things investors need to keep in mind
The relationship between the U.S. and China is likely to deteriorate, in my
view – that was always my base case and should not come as a surprise. But,
at least for the time being, tariff increases are on hold, and I believe
that is all we could have hoped for coming out of the G-20 meeting.
The recent increase in U.S. wage growth is not, on its own, enough to stop
the Fed from dialing down its monetary-policy normalization. In other
words, I believe the Fed will not tighten as much as expected next year –
and we are likely to see that in the “dot plot” released after the Federal
Open Market Committee meeting. While I expect the Fed will still hike rates
next week, I believe the Fed’s policy prescription for 2019 is likely to be
just two rate hikes – and that should be good news for markets, in my view.
(And, depending on the data, that policy prescription may get adjusted down
in future dot plots.)
While I expect higher volatility, that doesn’t mean that long-term
investors should abandon risk assets. We have long warned that volatility
could increase as the Fed normalized. In addition, market turbulence has
been exaggerated by program trading by computer algorithms as well as the
use of derivatives – but that has nothing to do with fundamentals.
In conclusion, I was a lot more worried in August and September than I am
now. Back then, valuations were stretched, and I was concerned that
investors had become less confident in stocks since the February selloff,
suggesting they would flee the market and turn “risk off” at the first sign
of trouble. I felt that markets had overpriced the positives and were
overlooking the negatives, such as the potential for the trade situation to
deteriorate, at its peril. Many of my concerns have now been realized, and,
in the process, much of the froth has been shaken out of the market.
While stocks could certainly move lower from here, this is not a time for
investors with long time horizons to abandon risk assets, in my view. (In
fact, I don’t believe there is ever a time for that, as investors need
growth potential to meet their investment goals and are notoriously bad at
market timing.) Rather, I see this selloff is an opportunity for investors
to begin writing a “wish list” of investments they would like to add to
their portfolios if they have cash available. One such area is technology;
after all, some investors couldn’t stomach buying tech at levels earlier
this year because of the significant runup tech stocks experienced. Now
tech is much more reasonably priced, in my view. In addition, I believe
emerging markets – especially Asian emerging markets – are looking more
attractive given the potential for the Fed to take its foot off the
accelerator next year. And, the MSCI Emerging Markets Index is actually up
about 5% from its lows this fall.3
It feels like investors are walking on eggshells and have become overly
sensitive to bad news. However, I do expect the next few weeks to bring
some good news in the form of a kinder, gentler “dot plot” – even if we
don’t get a pause in trade tensions. Hence, I hold out hope that we could
at least see
a modest “Santa Pause” rally
by year-end. But whether or not we get a rally, I believe it’s critical
that investors with longer-term time horizons and investing goals put this
market turbulence in perspective – and stay the course.
1 Source: Cabinet Office, as at Dec. 10, 2018
2 Source: Eurostat, as at Dec. 7, 2018
3 Source: Bloomberg, L.P., as at Dec. 10, 2018
is Global Market Strategist at Invesco. This article first appeared in
the Invesco blog.
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All stock exchange-related figures are quoted in U.S. dollars.
The risks of investing in securities of foreign issuers, including
emerging-market issuers, can include fluctuations in foreign currencies,
political and economic instability, and foreign taxation issues.
Investments focused in a particular sector, such as technology, are subject
to greater risk, and are more greatly impacted by market volatility, than
more diversified investments.
In a “no-deal” Brexit, the U.K. would leave the EU in March 2019 with no
formal agreement outlining the terms of their relationship.
The Federal Reserve’s “dot plot” is a chart that the central bank uses to
illustrate its outlook for the path of interest rates.
Gross domestic product is a broad indicator of a region’s economic
activity, measuring the monetary value of all the finished goods and
services produced in that region over a specified period of time.
Risk-off refers to price behaviour driven by changes in investor risk
tolerance; investors tend toward lower-risk when they perceive risk as
The MSCI Emerging Markets Index is an unmanaged index considered
representative of stocks of developing countries.
The opinions referenced above are those of Kristina Hooper as at Dec. 10,
2018. These comments should not be construed as recommendations, but as an
illustration of broader themes. Forward-looking statements are not
guarantees of future results. They involve risks, uncertainties and
assumptions; there can be no assurance that actual results will not differ
materially from expectations.
This does not constitute a recommendation of any investment strategy or
product for a particular investor. Investors should consult a financial
advisor/financial consultant before making any investment decisions.
Invesco does not provide tax advice. The tax information contained herein
is general and is not exhaustive by nature. Investors should always consult
their own legal or tax professional for information concerning their
individual situation. The opinions expressed are those of the author(s),
are based on current market conditions and are subject to change without
notice. These opinions may differ from those of other Invesco investment
© 2018 by Invesco Canada Ltd. Reprinted with permission.