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Putting in perspective the Sell-Off in equity markets

The divergence between the positive performance of the US market year to date and the negative performance of other markets has finally found a way out: a downward convergence. As a result, the US market has been flirting with zero performance since the start of the year (+3.5%) and the other markets have sunk into the red. Note that from September 20 to October 11, the correction was -7% both for the S&P 500 and for the MSCI AC world ex US.

As in February, the sudden rise in long rates was the trigger of this Sell-Off which concerned at first technology stocks,  luxury in Europe and small caps all over the world. In other words, it is primarily about taking profits on star performing equities of the last few years. This new shock of volatility that can be read on the VIX (peak at 25 in October 11th, even below the peak at 37 in February) shows that the shock of the beginning of the year was not isolated, but corresponds to a more structural movement , the volatility following the tightening of monetary policy with a lag of about 2 years.

Other signs that the aforementioned divergence had alerted, such as the behaviour of the cyclicals/defensives ratio, downward-oriented since the first protectionist threats to steel and aluminum in March. Historically, two macro factors are key to endorsing a lasting reversal in favour of defensive stocks. The rate factor, rather led by the US and which remains pro-cyclical at the moment, and the industrial raw material factor, rather under China's influence since the years 2000. The cyclicals/defensives ratio clearly followed this second factor on the downside, indicating the prevalence of risk on global growth.

In 2017 global growth was strong (+ 3.8%) and synchronized (positive for equities), in 2018 it was strong (+ 3.8%) but out of sync (increase in volatility). In 2019, it will remain strong but will decelerate (+ 3.6%), which encourages some cautiousness while Fed rates are approaching the neutral rate. The master word remains the search for quality, making sure not to overpay it.

2018.10.19 - Putting in perspective
MIJOT Eric , Head of Equity Strategy, Deputy Head of Strategy Research
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Putting in perspective the Sell-Off in equity markets
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