When the wind begins to blow Keep you head together, James Taylor

Global equity markets have been hit full on this week as governments around the globe are introducing measures to halt the spread of the virus, alongside no sign of a stimulus package and the US election is only days away with no certainty the result will be a clear cut one. Sentiment indicators are now well and truly back into fear. The Vix index has reached its highest level since June. Global equities have given back around 6% as have US ones, the Nasdaq and S&P 500 correcting in line with one another. Global equity indexes are down on the year, the NASDAQ index, despite the correction, is still up just under 30% year to date.

We wrote some time ago that equity investors have a way of punishing governments for not providing stimulus measures when promised and so this has passed once again. The good news is further stimulus is probably not too far away. The fiscal package is likely to be agreed upon once the election is out of the way. The ECB at their monthly meeting made it fairly clear that expectations for growth had weakened and will likewise look to add further stimulus before the year-end. The Bank of England will also most likely increase the purchase program but may stay short of moving rates into negative territory.

For those who like to know where the technical levels are for the major indexes, the S&P 500 could fall around another 5% to hit the 200-day moving average. Aside from March, the 200 day average has provided solid support in the past year. Money flow charts suggest capitulation is near and although sentiment indicators are back in fear territory, they could have further to go. It would seem sensible to conclude that we may have a few more weeks of uncertainty whilst we get the election result and clarity on the fiscal stimulus that equity investors will remain largely on the sidelines.

The real question is, will these new measures interfere with the hopes that the global economy will recover next year? That probably depends on the severity and duration of any new lockdown restrictions introduced. One would expect from their election rhetoric that the Democrats are more in favour of stronger measures to control the spread than those favoured by Trump et al. Currently after a near 8% decline this year in Global GDP, analysts forecast recovery of between 5-7% next year.

There has been little in the way of safe havens in October, the price of gold has fallen around 5%, back to 1850 dollars an ounce. Longer-dated bond prices have fallen. Equity markets are supposed to be forward-looking. In the short term they may be looking forward or perhaps not to the short term impact of the virus, but at some point will return to the longer-term outlook. What is also of note during the current selloff the one equity market that holds up is China’s.