October has been a rough month for stocks. Government bond yields, known as the safe-haven trade, have remained elevated even in the face of major volatility in the global equities markets.
Generally speaking, volatility has increased due to a myriad of factors which have slowed momentum trading in equities. Markets have been pressured by a combination of Fed rate normalization, as well as the Fed buying fewer bonds in the open market, trade tensions with China, debt issues in Italy and geopolitical tensions with Saudi Arabia. With market participants knowing that the Federal Reserve is taking its foot off the gas with respect to low-interest rates, the result has been a much more volatile and unpredictable bond and stock markets. Many are questioning if this week’s sell-off is the start of something bigger or simply another wash-out until a move higher in equities. Riskier-priced assets are already in correction territory (corrections are considered to be sell-offs of 10%). The usual relationship of interest rates dropping in the face of volatility has not happened as one would have expected in previous market sell-offs since the Great Recession. This is forcing the market to deal with a more normal market price on all asset valuations, from real estate to technology stocks.
In economic news, the economy remains strong with the first reading on 3rd Quarter GDP in at 3.50%, though down from the 4.2% seen in the 2nd quarter. Inflation remains tame. All eyes will be on the Fed’s favorite gauge of inflation, the Core PCE, which will be out on Monday and could sway the Fed regarding the direction of short-term rates in the coming months.
However, the global growth story that consumed the markets earlier in the year has slowed and there remain concerns that additional Fed tightening may lead to a recession. Given the fear we witnessed this week in the market, we are cautiously optimistic that rates may fall further should we witness another tough week in equities. Combining that with the need for banks to lend may result in better pricing for borrowers even in a rising rate environment.