This week saw some big moves in the stock markets but little change in currencies and bonds. Economic data is coming in moderate and last week we wrote of a taper tantrum where the markets were adjusting to – again – a new reality of higher interest rates.
Earnings from US financials were neither strong nor weak for and we didn’t see any major surprises in the economic numbers. Friday October 12, 2018 we saw the University of Michigan Consumer Sentiment fall and was a little lower than expected by the markets. Earlier in the week we saw core inflation and overall inflation, both year over year, were at 2.2% and 2.3% respectively which were each 0.1% below consensus expectation but above the 2% target for the US Federal Reserve.
Last week we saw bonds above 3.2% while this week on Wednesday we saw the S&P 500 drop 3.3% and the TSX drop 2.1%, followed by a lesser drop on Thursday and a small rebound on Friday. In the US, the majority of the decline was caused by tech shares to the likes of Amazon, Netflix and others.
The VIX, known as the volatility index, rose suddenly to 24.45 at it’s peak Wednesday from around 12 at the beginning of the month.
As there were no sudden changes or major surprises to economic news or company guidance, we find that this sell-off is likely due to algorithmic trading and quantitative models rebalancing as we believe they can take a day or two to adjust for changes in the markets such as US treasury yields or the VIX.
Time will tell to see if there is more softness in the economic numbers or if this is just a temporary breather. For the time being we are not changing our thesis on the portfolios and will hold until there is more reason to make a change.

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