October was a bloody month for stock markets, which fell 7% in the US and 4% in Europe.
In September, US interest rates rose, making borrowing money more expensive. > Read our story
US economic growth exceeded expectations last quarter, but business investment was markedly slower. > Read our story
In October, the International Monetary Fund lowered its global economic growth forecasts, blaming trade wars. > Read our story
Investors had been fretting for a while about the cumulative effect of US import taxes (a.k.a. tariffs) resulting from an escalating trade war with China when taken together with rising interest rates and a stronger dollar. Combined, these things make it tougher for US companies to make money and for the economy to grow. As talismanic names reported disappointing third-quarter earnings that consistently flagged these chickens, investors may have sold other US stocks for fear they were indeed coming home to roost.
As stocks fell in October (bar the occasional exception), investors didn’t follow their usual approach of buying bonds instead – they seemingly took some of their money out of markets altogether, electing to keep it in cash. When stock prices fall, bond prices usually rise as investors opt for the comparative security of a regular interest payment. When prices of both are falling at the same time, like in October – i.e. they’re “highly correlated” – it can indicate to investors that others in the market are seeking to avoid any sort of risk at all (a.k.a. “risk off” sentiment). That can then drive a self-perpetuating cycle of selling, as seen last month.
Rebalancing helps investors “buy the dip”.
The aim of rebalancing is to ensure that a basket of investments maintains its original diversification, as opposed to being swayed by market moves. In October, investors took money out of stocks and kept it in cash – although they wouldn’t have made much of a return, it’s still better than losing money in falling stocks. To rebalance, investors might now start buying shares of companies that fell the most – since they may well recover. Although so far this year, at least, they haven’t immediately.
Investors started November in a better mood.
Stocks began a nascent recovery this past week. Besides “buying the dip”, investors may have had some reasons to feel more positive about markets. Companies like Under Armour and Facebook reported quarterly results that were more pumpkin spice than Halloween horror – and there appeared to be signs of progress on major trade bugbears like Brexit and the US-China spat.
On Thursday, the Bank of England said the UK economy’s running at full pelt, meaning it will probably raise interest rates faster than it previously thought – but held off doing so just yet, partly because of Brexit. The central bank believes the UK leaving the European Union’s a wildcard – it can’t say what’ll happen to the value of the country’s currency or whether demand for its products and services will fall. Rates are therefore holding steady for the time being.
In the short term, bitcoin and stocks are correlated; in the long term they aren’t, according to Forbes: Read more