October is proving to be a difficult month for markets and several factors have been driving the current situation. Here’s a quick overview from our Investment Team:
INFLATION AND CENTRAL BANKS
Since the financial crisis in 2008, Quantitative Easing (aka QE – a way for a central bank to support its economy) has generally caused bond and share prices to rise. Over the last couple of months, interest rates have been increasing, leading bond prices to fall and equity markets to decline. This has been driven by an increase in concerns about inflation, primarily in the US, and markets are aware of the well-publicised plan of US Federal Reserve (who set US interest rates) to continue to increase interest rates over the coming few years and lift them from their historically low level, reflecting the continued economic recovery.
There is concern that since the US, Canada and Mexico struck a trade agreement in September, President Trump will turn his attention to China. However, we believe that concerns over US and China trade are overhyped and it remains in each country’s interest to reach a mutually beneficial agreement. Markets are currently reacting to a concern that political posturing will turn into action, but in reality, the US and China need to continue trading with each other.
Brexit is likely to only have a significant impact on financial markets in the UK, with a lesser impact on markets in Europe. Our analysis shows that Brexit is not a factor for US, Japan or Emerging Market economies given their low level of trade dependence with the UK. However, the UK Government’s inability to strike a deal with the EU has increased concern about the outlook for the UK, and to a lesser degree EU member states, and this is already largely factored into the price of our respective stock markets.
At Wealthify, we remain positive about the economic outlook, and the case for riding out the current market downturn and remaining invested over the long-term. We are closely monitoring market movements and adjusting our customers’ investment plans to ensure they are positioned to weather the current situation.