A modest market correction has reminded investors that short-term volatility is a normal feature of long bull runs. This week, Tom Stevenson highlights the focus on US consumer strength—through retail data and Black Friday spending—while in the UK, attention turns to the upcoming Budget and how markets may respond.
Tom Stevenson, Investment Director at Fidelity International comments on what’s driving markets this week: “Markets fall back by 5% all the time. That kind of correction is not really a big deal. A degree of volatility is simply the price that we pay for the long run outperformance of shares over smoother asset classes like bonds and cash.
“But after six months of steadily rising share prices, the pullback over the past couple of weeks has come as a reminder that this is how markets work. Investors had become complacent.
“Unsurprisingly, it has been the more speculative corners of the markets which bore the brunt of increasing investor anxiety last week. So-called meme stocks, those linked to bitcoin, non-profitable tech stocks and the like all came off the boil.
“Although, no-one likes to see the value of their investments retreat, it is probably no bad thing for some of the frothier valuations to re-set. It can be the pause that refreshes a bull market. And sure enough, this week has started a bit more on the front foot.
Central banks and company news steady investor nerves
“Markets got a boost on Friday after New York Fed President John Williams said that a near-term rate cut in December remains a possibility. One of the key drivers of volatility recently has been a growing sense that the Federal Reserve has less to offer in terms of lower interest rates than investors had hoped.
“There was also some good news from Nvidia, both in terms of its better-than-expected sales in the latest quarter and a report that the US government is preparing to let the company sell its H200 chips to China. Concerns about the AI narrative that has driven shares higher this year were the second reason for the recent choppiness in stock markets.
“After a volatile day on Friday, which saw the US S&P 500 benchmark swing into loss and back to profit again, the index ended the day around 1% higher, although still down on the week. Futures markets point to further gains today after advances in Asia and Europe.
“Bitcoin, which has tumbled from its recent high above $125,000 to around $85,000 also seemed to stabilise. Meanwhile, the price of oil, a key economic input, declined as traders weighed up the possibility of a peace deal for Ukraine.
Spotlight on US retail and consumer resilience
“This week, the main economic focus will be US retail sales, with growth in September expected to have moderated as consumers respond to higher prices and growing job worries. The retail sales report on Tuesday comes ahead of the Thanksgiving holiday and the Black Friday sales, which typically kick off the year end pre-Christmas spending spree.
“Fears about the health of the US economy are showing up less in the performance of the headline S&P 500, which is driven by the outlook for the Magnificent Seven tech stocks, and more so in the performance of the more cyclical equal-weighted index. This more representative benchmark has now fallen back below the level it reached in February, a sign perhaps that we are starting to see a more broad-based correction in markets.
Parallels with the late-1990s tech bubble
“If that is the case, it underscores the parallels with the dot-com bubble at the end of the 1990s when the tech-heavy Nasdaq index rose sharply in 1999 even as the broader market made more modest gains and did so in a volatile fashion that’s typical of a mature bull market.
“While that might suggest the end of the long post-financial-crisis bull may be on the horizon, it also points to the possibility that the end is not yet imminent. The final choppy stage of the 1990s bull market continued for a good year, and it may well be that we face something similar today.
“That matters for investors because an analysis of the returns in the earlier bubble period shows how important it is to remain exposed to the market leaders during the final phase of a bull market. Going defensive too early, or withdrawing from the market altogether, can be tempting when there is talk of a bubble and valuations look high, but it can be expensive.
UK Budget in focus
“On this side of the Atlantic, attention turns to how bond markets respond to Chancellor Rachel Reeves’s second Budget. Investors will be watching closely to assess the government’s approach to fiscal discipline and its implications for borrowing costs.
“The market reaction matters because the UK currently spends more than £100bn a year on interest payments. Even a 1 percentage point movement in bond yields can shift the annual cost of servicing government debt by around £17bn.”
