October 19, 2018

News in Charts: Markets stirred but not shaken

by Fathom Consulting.

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This week, financial markets stabilised somewhat after the volatility of the previous week, in which the S&P 500 saw its biggest one-week fall since February. Even within the relative benign market experience of the last three years, last week’s sell-off did not particularly stand out. It has, however, validated a pattern consistent with the inherent instability between late-cycle macroeconomic fundamentals and richly priced risky assets. This has further vindicated Fathom’s preference for running lower levels of risk across its asset allocation recommendations since the beginning of the year.

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However, last week’s market action brought out some other interesting dynamics. In particular, the sell-off seemed motivated less by expensive valuations and more by uncertainties around the fundamental macroeconomic backdrop. Some clues for this were offered by emerging markets’ failure to outperform their developed market counterparts in the aggregate, despite an already sizeable gap in relative performance this year. Fathom has previously argued that the macro cycle and equity prices of emerging markets might not decouple from those of developed economies when the next downturn occurs.

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One place that offered some evidence in favour of closing relative valuations was the UK. Relative equity valuations between the US and the UK remain at close to all-time highs, however last week’s movements have continued a process of convergence that Fathom pointed to back in September, and that has the potential to normalise over the course of the next several months.

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