October 2018 Monthly Market Review
Rising U.S. interest rates, ongoing global trade tension, and country-specific geopolitical issues contributed to a sharp shift in investor sentiment during October. Global equity markets sold off sharply while volatility grew considerably. Weakness was widespread and many equity markets hit correction territory. Equity volatility rose sharply since the prior month-end. In a reversal of recent equity market trends, growth stocks lagged their value counterparts. The shift in stylistic leadership was driven in large part by a sharp downturn in the tech sector, where fears of a deceleration in earnings provided a headwind. The style spread was most pronounced in emerging markets.
While U.S. Treasury yields rose, the curve steepened during October. Fed Chair Jay Powell indicated that the Fed will continue to raise rates. Powell’s hawkish comments, considered alongside generally favorable domestic macro data released during the month, put upward pressure on interest rates. Rising Treasury yields and a strong U.S. dollar (USD) had a profound impact on risk assets. It is noteworthy that Powell’s comments did not put upward pressure on yields outside of the United States. However, the comments did impact the currency market. The USD rallied against a basket of developed market currencies. The dollar moved similarly against emerging markets (EM) currencies with the exception of trading lower against the Argentine peso and Turkish lira, both of which rebounded sharply from extreme weakness in September. The Brazilian real benefited from Jair Bolsonaro winning the presidency.
Emerging markets equities fell 8.7% (USD)—the largest monthly drop since August 2015. Losses were broad-based and many were driven by idiosyncratic factors beyond global trade rhetoric. Key laggards included IT-heavy economies such as Korea and Taiwan. China was also further pressured by reports of weak economic data. Despite its volatile macroeconomic backdrop, Brazil was a bright spot as markets reacted favorably to the election. Frontier equity markets was also a relative outlier on the back of stabilization in Argentina
Natural resource equities underperformed the broader equity market with energy equities and metals and mining stocks declining. In October both sectors were hurt by broad market volatility and global growth concerns, which dampened forecasts by Organization of Petroleum Exporting Countries and others for global crude demand in 2019. Energy equities also declined on supply concerns. Metals and mining equities faced increased resource nationalism by countries seeking to extract additional economics from companies by proposing higher royalty and profit sharing rates or through legal action.
Returns for flexible capital managers varied widely, but were mostly negative in absolute terms. Credit and event-driven managers tended to perform better than their long/short equity peers. However, managers with larger equity allocations faced greater headwinds and tended to post larger losses. Absolute return managers tended to preserve more capital during the month. Those with equity exposure felt some of the pain, but bond prices in general were not as affected by the sharp decline in stock prices. Credit managers with little to no equity beta fared better.