Stocks have struggled in October, down 5% through Friday, October 12th. The declines do not appear to be due to concerns over the economy, as nearly all signs point to continued strong growth. Instead, markets appear to be digesting the recent rise in interest rates, which itself is a reflection of a strong economy.
Stocks typically do not decline significantly absent an economic downturn. With that in mind, this autumn marks the 10 year anniversary of the global financial crisis, as well as the 20 year anniversary of the 1998 Asian financial crisis.
These two episodes occurred after troubles in the banking system spread throughout the global economy. Just as the heart pumps oxygen throughout the body, the banking system provides capital to help the economy grow. In 2008, banks lost money due to mortgaged backed securities. In 1998, a default by Russia on its sovereign debt was the tipping point.
Fortunately, banks are in a better financial position today versus 10 or 20 years ago, and should be better able to withstand any economic turbulence that may arise – helping to ensure that potential problems in one part of the economy stay contained. This may be one reason that stocks have shaken off trade concerns and troubles overseas in places like Turkey and Argentina. Perhaps a more pressing concern for equities is how the Federal Reserve will address rising inflationary pressures without triggering economic instability in the process.