The US equity market had disengaged itself significantly from the “rest of the world” this year so far. While various larger equity markets such as Germany, South Korea and China trended sideways or even markedly negative, US equities benefited from impetus that was for the most part limited to the US. In fact, the winners within the US can be limited to an even greater extent to a small number of technology stocks. Consequently, the correction we are now seeing is emanating primarily from these technology stocks, but is not leaving the equities of other sectors or countries untouched either.
This correction was generally expected and as we see it, the higher volatility on the markets is not unusual for the final phase of an equity market cycle. The number of crises has also risen in recent months. Growing protectionism in particular has the potential to seriously weaken the growth cycle.
The current correction has seen the DAX drop around seven percent within a week and tech stocks in the US (Nasdaq 100) even lost around ten percent of their value. The correction offers buy-in opportunities and bargain hunters should significantly step up their activities.
The various crises to date have not made any noteworthy inroads into corporate profits. These are the backbone of the stable development on the financial markets and the indices stated are now considerably cheaper following the correction. If the earnings potential shows signs of a sustained slowdown, (re) entering the equity market might prove to be a mistake. However, we do not expect such a scenario to emerge at present and are confident instead that our assumptions regarding economic development – stable global growth on the whole, supported for the most part by the US – will continue to offer earnings potential to the companies.
In our opinion, there are two factors that support the success of the recommended bargain hunter strategy in the short term. For one, a positive year-end price performance within the scope of a seasonal pattern is generally likely (year-end rally). On the other hand, we are hopeful that, once the mid-term elections are over (6 November), US President Trump will take a breather from his aggressive rhetoric that is spreading uncertainty.