The October market swoon has continued since we last wrote two weeks ago. The S&P 500 has fallen nearly 9% this month, giving back almost all of its 2018 gains. Most other types of investments – bonds, commodities, and foreign stocks included – have pushed solidly into negative territory for the year.
Two factors appear to be driving the volatility.
The first is the recent rise in interest rates. Federal Reserve Chairman Jay Powell said this month that short-term rates were “a long way” from where he believes they should be, implying the Fed could raise rates more than anticipated.
Secondly, investors are increasingly concerned about a drawn-out trade war with China. Until recently, the consensus was that trade tensions represented “posturing” between the two countries. That view has been called into question, however, following a speech this month by Vice President Mike Pence in which he laid out a vision for a more protracted economic confrontation with China.
Nevertheless, economic data continues to be strong, including a report last week on third quarter GDP that exceeded expectations. Likewise, with half of S&P 500 companies reporting third quarter earnings, profits are up 23% versus one year ago, 6% ahead of expectations.