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Small Market Correction Long Overdue

15 November 2017 by Mark Holman

Over the course of the last week we have witnessed a small market correction, which raises the question of whether we should we be worried that this is the start of much bigger correction?

So far this year every small dip has been bought by eager investors, and so far this has been the right trade. So is there anything different this time?

Well the market is currently more expensive than in previous dips, but that in itself is not a strong reason to worry. We are also rapidly approaching the year end, which for most fund managers is just a date, but for traders with calendar year end P&L’s its easy to see why their risk appetite is subdued after such a strong year. Year end balance sheet pressures are not what they used to be but traders will be cognisant of adding to inventory with, realistically, only three ‘normal’ trading weeks left this year. Mutual fund flows have been strong most of the year, but monies have been leaving HY bond funds and equity funds in the last two weeks, and this has certainly detracted from what has been a good technical picture for pretty much all year. So I think overall we can conclude that the technical situation has weakened, which certainly supports a short term bout of healthy profit taking.

It is when we look at the fundamentals that we doubt the current weakness is the start of a bigger correction. We have highlighted several times the importance of the global coordinated economic recovery, and this remains firmly on track. We also have ultra-easy monetary policy globally. Rates remain extremely low and despite the Fed shrinking their balance sheet incrementally each month, the balance sheets of the major central banks will in aggregate still be increasing as we start 2018. The lack of inflation means that this ultra-easy policy has been in situ much longer than many would have expected. The Fed is only moving ahead with its small hiking plan to give itself capacity to support future economic weakness. So we have strong central bank support to feed the continuation of the good fundamentals as we go into 2018. We also have the possibility of some fiscal expansion, which is pretty rare this late into the cycle.

If we had to pick conditions to create expensive markets, then the current situation would certainly qualify, which is why we think this current dip will again be a buying opportunity. Obviously, timing is important, and this current wobble may well be slightly deeper and longer than we have grown accustomed to this year, due to the technical backdrop mentioned above.

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