The big question now, of course, is whether this is merely temporary respite, affectionately known by those in the trade as a ‘dead cat bounce’. Most analysts think the worst is already over. But a few outliers think there could be further pain to come, most notably equity strategist Mike Wilson at Morgan Stanley – and he’s worth listening to (which you can, in fact, here).
Back in August, he suggested that the market was entering a “destructive phase” that could see the tech-heavy Nasdaq hit by a 15 per cent correction and the S&P a 10 per cent drop. It’s worth pointing out that Mr Wilson’s warnings were far more than the repetitive doomsaying of a so-called perma-bear – last year he correctly called the continuing ascent of US markets. And when you take time to understand the rationale behind his shift in direction, it’s clear that the coming true of his prediction in October has been more than a lucky guess.
In the case of the S&P, Mr Wilson noted in August that many sectors had in fact been losing air for some time, as part of what he describes as “a rolling bear market” – this, he said, hadn’t yet caught up with some of the growth shares that have driven the markets to record highs. And, lo and behold, October’s sell-off has been led by the two growth sectors that hadn’t previously been steamrollered – technology and consumer discretionary. But corrections, Mr Wilson said, often end when the hottest sectors finally fall out of favour – does that mean it’s time to buy back in then? A quick look at FAANG share prices today would suggest so – as I write, Netflix, Facebook and Amazon are all trading 5 per cent higher today.
Investors could be jumping the gun, though. Mr Wilson suggests investors should be patient when buying the dip, pointing to continued monetary tightening and a likely contraction in global earnings growth in 2019. With S&P 500 operating margins hitting an all-time high of 12 per cent in the third quarter, it’s certainly hard to see where further profit expansion is going to come from – in fact, it’s far more likely that margins will revert to their long-term mean of around 8 per cent, especially if US wage growth continues to rise at the rate it has in recent months. And growth sectors such as technology still face growing headwinds, as the digital services tax announced in this week’s Budget highlights. Tempting though bargain hunting may be after this correction, it’s probably not safe to come off that balcony just yet.
