October’s selloff scares in context

By BlackRock

Key points

  1. We maintain our preference for equities over fixed income but reiterate the need to focus on portfolio resilience amid increasing uncertainty.
  2. Stocks fell, led down by growth and momentum shares. The VIX volatility gauge hit its highest since February. Quarterly earnings season began.
  3. Third-quarter earnings reports and corporate guidance should shed some light on how tariffs may impact business sentiment and global growth.

October’s selloff scares in context

Tighter financial conditions and elevated worries about the impact of heightened US-China trade tensions are spooking investors – and have helped spark this month’s equity pullback. We retain a preference for selective risk-taking, even as the recent market moves reinforce our call for building greater resilience into portfolios.

Chart of the week

Asset yield comparison, January vs. October 2018

Chart of the week

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index.
Sources: BlackRock Investment Institute, with data from Thomson Reuters, October 2018.
Notes: Indexes used from left to right are: Thomson Reuters Datastream 2-year and 10-year US Government Benchmark Indexes, Bloomberg Barclays US Credit Index, Bloomberg Barclays US High Yield Index and MSCI All-Country World Index. Yield in the equity market is represented by the 12-month forward earnings yield. Real bond yields are based on US Treasury Inflation-Protected Securities (TIPS) yields. January yields are as of 1st January 2018 and current yields are as of 10 October 2018.

Higher interest rates are one of the key contributors to tighter financial conditions this year. Market expectations for future Federal Reserve rate hikes have adjusted upward and are now consistent with our outlook for around three rate rises over the next 12 months. The result: Higher yields on short-term bonds making for greater competition for capital. This is contributing to falling equity prices – mirrored by rising earnings yields – and rising bond yields. The recent move higher in bond yields has been driven by higher real rates – not inflation expectations. See the light blue and green shaded areas in the chart above. A rise in the term premium, the additional return investors demand for holding longer-term debt, has contributed. Investors have reset their return requirements across asset classes, given heightened uncertainty and rising short-term yields. This repricing has escalated since the start of October.

Fortifying portfolios

Part of the recent equity market drop was due to jitters about an intensification of the US-China trade conflict. Some global companies cited trade concerns last week, fuelling investor uncertainty about the sustainability of the growth and earnings outlook. Our gauge of overall geopolitical risk has dipped in the past few weeks, but US-China trade tensions are high and we see trade tensions as the biggest global threat to the US-led expansion. Our BlackRock GPS growth indicators point to robust global growth with low inflation – and do not show trade tensions hampering economic activity. However, the negative threat posed by trade protectionism could yet feed through due to highly globally integrated corporate value chains. Third-quarter earnings season will be key to watch in this respect.

Last week’s decline in the MSCI World Index was the index’s second-largest weekly drop in 2018, although global equities remain in positive territory year-to-date. Equity markets have seen a sharp rotation in leadership, with momentum shares underperforming after a stretch of strong gains. We believe the bulk of the recent selling pressure has been driven by hedge funds unwinding popular crowded positions – especially in technology and growth names. The rise in 10-year US Treasury yields at the start of last week came after Fed officials’ hawkish commentary pushed up market expectations for the path of US policy rates. The rise in market yields has been driven by higher real rates and a higher term premium, often associated with increased uncertainty.

We still see corporate earnings supported by sustained above-trend global growth, and retain our preference for equities over fixed income. But we reiterate our call to focus on portfolio resilience. Companies that disappoint on third-quarter earnings and fourth-quarter guidance risk being acutely punished. We like quality exposures within equities and prefer the US within developed markets due to earnings resilience and stronger balance sheets. In fixed income, we favour short-end bonds but are starting to see opportunities further out on the yield curve in the US and Europe. Over the long term, the rise in yields should eventually point to higher returns across asset classes. Yet we see good reasons why risks will stay elevated or increase further in the short term, pressuring returns.


  • October’s selloff across equities continued. The VIX hit 28.8, its highest level since February 2018. The S&P 500 notched its largest one-day drop in eight months on Wednesday, with the technology sector leading declines. US 10-year Treasury yields climbed to seven-year highs before falling back. Brent oil prices fell.
  • The US core (ex-food and energy) Consumer Price Index (CPI) rose slightly less than expected in September. Shelter inflation (core CPI’s biggest component) started to show weakness and bears close watching.
  • Profit warnings from some global companies citing concerns over Chinese demand cast a cloud over third-quarter reporting season. Trade negotiations between US and Chinese representatives ended without progress in Beijing. China’s central bank announced its fourth rate cut this year, and China’s yuan weakened versus the US dollar.



  Date: Event
Oct 16 China Producer Price Index, CPI; Germany ZEW Economic Sentiment Index; US industrial production, capacity utilization
Oct 17 FOMC minutes
Oct 18 European Council meeting (potential update on Brexit)
Oct 19 China Q3 gross domestic product (GDP), industrial production, retail sales, fixed asset investment; Japan CPI

Third-quarter earnings season is here, with 75% of the S&P 500, 59% of the STOXX 600, and 50% of TOPIX market caps set to report results over the next three weeks. Analysts overall haven’t lowered their earnings expectations, even as some global companies issued profit warnings last week citing higher input costs, rising wages, trade tensions and/or softer Chinese demand. A strong US consumer and tight US labour market still provide a supportive backdrop for results. Earnings reports and corporate guidance should provide more colour on how tariffs might impact business sentiment and global growth. China’s GDP data will also be in focus: Economists expect China’s growth to gradually soften, but any downward surprise could further weigh on sentiment as we enter earnings season.

Global Chief Investment Strategist, BlackRock Investment Institute
Richard Turnill is Global Chief Investment Strategist for BlackRock. He was previously Chief Investment Strategist for BlackRock’s Fixed Income and active Equit

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