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Monthly Market Commentary - October 2018

Jon Cunliffe, Charles Stanley Asset Management's Chief Investment Officer, with his monthly market commentary.

Jon Cunliffe

in Fiduciary news


Global equities ended the month broadly unchanged, but under the surface there was quite a wide dispersion of returns both between and within markets. Much of this is due to the less synchronised global growth dynamic which has been evident in recent months, but some is also a function of the gradual removal of monetary policy stimulus led by the US Federal Reserve.

As expected, the Fed increased its key Fed Funds rate by 0.25% to 2.00 -2.25% at its September meeting. The guidance to the market remains for further tightening over the next 18 months, but there is still an unresolved tension between where the FOMC anticipates rates peaking (3.5%) and the market (3%). At the heart of this lies the issue of central bank credibility: with the US economy remaining on a firm footing the Fed doesn't want to be seen as soft on inflation so has deliberately stated that policy is likely to move into restrictive territory. However, the market feels that with inflation expectations currently well anchored the Fed may not need to tighten quite as much. This tension will only be resolved by the money markets raising the expected peak of Fed Funds, in response to more evidence of increasing inflationary pressure, or by the Fed signalling it expects more moderate growth and commensurately less policy tightening.

With global growth less synchronised, higher US interest rates have been more disruptive to a number of the weaker Emerging Market countries, because better US growth prospects and higher yields have encouraged capital to flow back to the US. In general, this has caused financial conditions to tighten both in Asia and EM more broadly as pressure on domestic currencies has prompted a number of central banks to tighten policy at a time when the growth outlook has, on the margin, begun to deteriorate.

Elsewhere, and despite recent better news on US trade relations with Canada, Mexico and the EU, the ongoing trade war between the US and China is becoming more entrenched. As a consequence, there is increasing nervousness ahead of the third quarter earnings season about future earning guidance. As things stand, it looks like we will see year-over-year US earnings growth of roughly 20%, which ought to be a tailwind for equities but uncertainties around trade are prompting a degree of caution on the part of investors. What is striking is that the market estimate of S&P earnings for 2019, based upon the current level of the equity market, equates to a forward earnings multiple of 15.5 times, a much less demanding level than a number of months ago.

Markets are contending with the competing influences of tighter monetary policy and measured liquidity withdrawal and more attractive valuations and solid corporate earnings growth. On balance, we retain an optimistic long-term stance on equities, particularly given the generous valuation versus bonds, but we would accept that in the short term the news flow has been negatively impacting investor sentiment.


The value of investments, and any income derived from them, can fall as well as rise and investors may not get back the original amount invested. Past performance is not a reliable guide to the future.  Charles Stanley is a trading name of Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority. A member of the London Stock Exchange. Registered in England No. 1903304. Registered Office: 55 Bishopsgate, London EC2N 3AS. Tel: 020 7739 8200. Charles Stanley & Co. Limited is a wholly owned subsidiary of Charles Stanley Group PLC.

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