The stock market rout: A healthy correction, or the start of a bear market?

Market Week in Review is a weekly market update on global investment news in a quick five-minute video format. It gives you easy access to some of our top investment strategists. Our experts will keep you informed of key market events and provide you with an easy-to-understand outlook on the week ahead. Subscribe to receive this market review every Monday, straight to your inbox.

In the latest update:

• Global equities slide in week of tumult. Is a bear market underway?
• What’s behind the market sell-off?
• Market outlook for Q4: More volatility ahead?

Is a bear market beginning?

The stock market was pummeled in a two-day stretch from 10-11th October, with major indexes tumbling across the globe. This has led many investors to wonder if the much-anticipated beginning to the next bear market is underway. Our answer? Probably not.

“The recent downturn looks a lot more like the market correction that occurred in early February, following January’s peak in equities,” Adam Goff stated. Looking at market moves so far this month, stocks appear to be re-tracing — or walking back — some of the excessive gains from the third quarter, Goff noted. Case in point: U.S. large-cap equities, as measured by the S&P 500® Index, were up approximately 7.5% last quarter, and are now down roughly 6.5% in October. Likewise, global equities (as measured by the MSCI World Index) advanced roughly 5% in the third quarter, and have now retreated by roughly the same amount.

“Essentially, we’re seeing the market re-thinking its excitement over the past few months,” Goff said, “with investors now realising that perhaps there’s more to be concerned about, especially in regard to the forward-looking economic outlook.”

What drove the market plunge?

What factors behind the scenes may have led to this shift in thinking? Looking at the actual news from the week of the 8th October, nothing in particular happened that should have triggered such a steep sell-off, Goff said. For instance, the release of the U.S. Bureau of Labor Statistics’ Consumer Price Index (CPI) for September showed a 2.3% increase, year-over-year. While that was slightly below consensus expectations, it wasn’t enough to set off a firestorm of concern, he remarked.

In Goff’s mind, in order to really assess what happened in markets, it’s best to take a step back and look at things from a broader perspective. Last year was an extraordinary year for markets, he said, with stocks consistently churning upward. Ever since this year’s January high-water mark, in Goff’s opinion, a very different sort of market environment has set in, “a push-and-pull between concerns about how high interest rates will climb, when inflation will become a problem and whether trade tensions between the U.S., China and other countries will impact economic growth rates.”

These issues have all surged to the forefront in the past few weeks, Goff said, likely indicating that the remainder of 2018 will be plagued by higher volatility across markets. While there will be a bear market at some point in the future, he reiterated that the recent slide is likely not indicative of its beginning.

Is volatility here to stay?

As for what the road ahead may hold for investors, Goff said it’s important to assess markets in terms of cycle, value and sentiment. When examined under these three lenses, he and the team of Russell Investments strategists don’t see the overall picture today as looking much different from a few weeks ago.

In terms of value, equities still remain very high, especially in the U.S., Goff said. “Across the globe, stocks are at levels from which we don’t expect explosive upside,” he said.

Turning to cyclical factors, he said that a tug-of-war remains between concerns over a flattening U.S. Treasury yield curve and rising interest rates, versus continuing robust economic data in the U.S. and many other regions of the globe.

In regard to sentiment, Goff said that he and the team of strategists don’t view the U.S. equity market as fully oversold yet, as they don’t think it’s quite poised enough for a big upturn. “We do feel that the S&P 500® Index’s dip below its 200-day moving average represents a point at which some investors who’ve been underweight U.S. equities may want to consider getting back in,” he stated. U.S. Treasuries may also be a little oversold, Goff added, due to the sharp spike in the 10-year yield during the week beginning the 1st of October.

All things considered, Goff expects to see continued volatility in the weeks and months ahead. The main takeaway, in his opinion? “Now is not a great time to be taking lots of risk, given historically high valuations and the late-cycle phase of the market.” That said, Goff concluded that he and the team of strategists at Russell Investments will be looking for opportunities to exploit market weakness in the days ahead.

Watch the video, listen to the podcast, or visit our downside management toolkit for insights on how to navigate through times of market uncertainty.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.