Fundamentals won’t help catch falling markets
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People and MarketsCommentLeader

Fundamentals won’t help catch falling markets

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Global equity markets' red October caught many by surprise. It was an unusual coincidence of mostly positive earnings reports and the worst month of stock performance for some time. Anyone looking to bring a deal to the market should pay more attention to the direction of travel than scavenging for positives with which to paint a rosy picture.

The S&P 500 ended October having lost 7.3% of its value and the tech heavy Nasdaq composite closed the month over 9% down. Other global benchmark indices also sold off aggressively.

By contrast Bank of America Merrill Lynch noted this week that 59% of the S&P 500 had reported their third quarter results, recording earnings per share growth of 24.6% year-on-year and beating analysts’ expectations by around 3%.

Admittedly, these were solid results rather than spectacular, but this is the sort of data that boosts stock indices. 

Instead, we can conclude that the market's recent fall is a reaction to the astronomical rise that preceded it.

The post-crisis equity bull market was not driven by stock selection on the back of corporate fundamentals but by investors crowding into popular trades, often through passive instruments.

In the case of firms like Netflix and Amazon, companies shares grew to be valued hundreds of times over what the firms actually earned.

It has taken little more than a slight change in sentiment on the long-term profitability of these firms, perhaps driven by trade war concerns, to kick off the selling. The herd has followed what were initially small volumes, likely accentuated by passive and automatic trading.

The tech firms have fallen more aggressively than the rest. Both Amazon and Netflix are down over 20% over the month, but their huge weighting in indices have brought US markets down with them.

Earnings did not propel these so called growth stocks to insane valuations and are unlikely to compel investors to arrest the slide.

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