Janus Henderson: Nightmare on Wall Street - what’s going on?

Global equity markets have fallen 9% in the last four weeks*, leaving us on course for the third worst October for returns since 1970. While there are many potential reasons for this – ranging from tensions over US/China trade tariffs to ongoing concerns regarding the Italian government’s draft budget, as well as rising US interest rates and slowing global growth data – there is no singular answer to explain what is happening.

More recent drivers of poor performance in equity markets could include third quarter results in the US. Certain industrial companies, including heavy machinery company Caterpillar, have delivered particularly disappointing results due to rising input prices as the impact from higher wages, interest costs and trade tariffs are beginning to bite!

Another recent concern is that US equity market earnings growth may be peaking. This scenario leaves the door open to potential earnings downgrades, which could be why we are seeing a shift to more defensive sectors, such as real estate equities.

This shift towards defensive stocks has seen global REITs outperform the MSCI World Index by 5% in the last four weeks** and, as investors now turn their attention towards 2019, we expect companies with certainty of earnings and dividends to be in higher demand.

Despite making gains, global REITS have underperformed the wider equity market by more than 40% since the ‘Taper Tantrum’ in May 2013***. Looking forward, with eight interest rate hikes now having passed in the US and REITs continuing to demonstrate above-inflation earnings growth, could it be that, while Halloween has come early for equity markets, the nightmare for REITs is over?

Market returns sourced from Bloomberg in US dollar terms
*MSCI World Index
**MSCI World Index versus FTSE ESPRA NAREIT Developed Index, from 25 September 2018 to 24 October 2018
***FTSE ESPRA NAREIT Developed Index, from 1st May 2013 to 24th October 2018