Pimco: Red October

Oct 29, 2018

By Joachim Fels, PIMCO Global Economic Advisor

What a difference three weeks make. When I embarked on my trip to Asia and Australia in early October, the S&P 500 was up almost 10% year to date. Now that I’m back, all of this year’s gains, plus some more, have evaporated. It’s almost as if investors fully endorsed the Indonesian president’s verdict at the IMF meetings in Bali that I highlighted two Sundays ago: ‘Winter is coming’.

Speculating on what exactly caused this ‘Red October’ is futile. Markets are prone to fashions, fads and herd behavior and thus often lead a life of their own. Also, October has traditionally been the most volatile month for stocks. That said, rising real interest rates in the run-up to the sell-off, more signs that output and earnings growth have peaked, and indications that trade tensions between the U.S. and China are more likely to intensify than ease in the next few months certainly didn’t help investor sentiment. And Jay Powell now probably regrets his off-the-cuff remark in an interview on October 3rd that the Fed funds rate is “a long way from neutral”, which markets interpreted as a hawkish signal.

Forecasting equity markets is neither my job nor my forte, so I will also refrain from speculating where we go from here. However, I stand by what I told Bloomberg in Hong Kong earlier this week: I do not believe this is already the start of the next big bear market