Should global stock markets expect a correction by the end of the year?
Adrian Lowcock, investment director at Architas, says Yes.
Markets have been stable for months and have been able to shrug off the surprise Brexit vote, weak economic growth and concerns over the Italian banking system. Investors seem to think that markets can handle anything, but they are far too sanguine. This is the perfect environment for a correction. Markets in recent years have largely been range bound and the direction of travel has been driven by big swings in sentiment, which is usually preceded by markets reaching new highs or multi year peaks. Valuations are high and companies earnings momentum hasn’t kept pace. At the moment, investors have been distracted from the fundamentals by political news and action from central banks. However, sentiment can change quickly and at current levels it won’t take much disappointment for investor confidence to shift. A slowdown in global growth, political uncertainty, collapse in confidence of central banks, or a hard-landing in China: there are plenty of candidates to trigger the next correction.
Jordan Hiscott, chief trader at ayondo, says No.
The resilience of the equity markets this year has been nothing but short of astonishing and remarkable, particularly considering the various extreme risk events that have taken place – Brexit, the military coup in Turkey. Before these events, I would have imagined a disorderly risk-off market. But actually, the overbearing theme throughout this has been the resilience of global stock markets to absorb these shocks. Over the summer period, implied volatility fell to extremely low levels which, as a seasonal factor, is not unusual. In addition to this we saw low traded stock volumes – again, not unusual for that time of year. Various analysts have commented that this created an artificially high-valued level in the market, and that once the summer period was over, the increased amount of market participants would lead to higher stocks volumes and increased implied volatility levels. This may have happened to some degree, but we are still just 40 points off the S&P 500’s summer high of 2193.