Investors may well be left wondering what to do after the second US market sell-off this year was spurred on by the Federal Reserve’s rate tightening cycle and concerns over global growth growing.
The most recent sell-off saw US markets sell-off by just over 3 per cent and follows a dip in the global bonds market spurred on by comments from the Fed last week over its plans to continue raising rates.
“The recent correction has been triggered by the increase in US real rates, rather than inflation concerns as was the case at end of January and the beginning of February,” said Fabrizio Quirighetti, co-head of multi-asset at SYZ Asset Management.
“The realisation is that, after the Fed’s meeting and Jay Powell’s comments, the Fed will continue to hike in 2019 – possibly at the same pace as this year.
“In other words, Powell signalled the Fed is now committed to bringing rates to a ‘neutral level’ and potentially beyond, as its two objectives are fulfilled.”
The S&P 500 has fallen by 4.36 per cent in October, so far, along with other developed markets. Only the FTSE All Share has suffered a bigger fall, dropping by 4.78 per cent.
Performance of indices month-to-date
Source: FE Analytics
While the US sell-off has been sharp, it isn’t completely unexpected, according to Paras Anand, Fidelity’s head of asset management for Asia-Pacific.
“The sharp sell-off in the US has likely caught no one by surprise,” said Anand. “If anything, investors have been wondering how, in the face of tighter monetary policy, a contracting labour market and rising oil prices, the US has continued to be so resilient.”
He added: “There are myriad explanations, but I believe that the price action of 2018 reinforces the idea that both active investors and the growing constituency of passive and systematic strategies have been long momentum and short volatility.
“In other words, investors are concerned about an uncertain political and economic outlook and have chosen both asset classes and sectors which appear to offer more robust fundamental prospects and which have demonstrated more predictable price action.”
Yet, while the sell-off might not represent much of a surprise for some market commentators, it is worrying nonetheless, said Witold Bahrke, senior macro strategist at Nordea Asset Management.
“Some market pundits claim there is no real 'new news', but in our view we have reached a critical mass on negative news, which has triggered this sell-off,” he explained.
“Bond yields spiking adding to monetary headwinds, global growth indicators – PMIs – falling and lastly political risk rising in the shape of the ongoing trade war, as well as Italy, are keeping investors awake at night.
“Each single issue is not new but adding it all up you get a toxic cocktail for markets.” 
The sell-off comes at an important time of the year said Royal London Asset Management’s head of multi-asset Trevor Greetham (pictured), who noted that October is a key month. Indeed, stock markets traditionally posit their best returns between October and April.
“Stock markets exhibit a very high degree of seasonality,” he said. “It’s hard for financial markets to make headway over the summer when trading is thin and there isn’t much going on in the world economy.
“As a result, an amazing 97 per cent of global stock market returns since 1973 have accrued during the seven months from October to April.
“However, volatility also tends to reach its peak in October a fact underlined by famous October crashes in 1929, 1987, and – more recently – 2008.”
Seasonality of stock market volatility (VIX index)
Source: RLAM
However, there is another reason that makes this October particularly pivotal, according to Greetham, who says his proprietary ‘Investment Clock’ model pointing towards a stagflationary period.
He explained: “Economic growth is slowing outside of the US, inflation is rising from low levels and the US Federal Reserve is raising rates.
“This is usually a bad configuration for stocks but we are living in a two-speed world with the emerging markets under pressure while president Trump’s tax cuts and spending increases keep the US economy strong.”
Greetham said he would use the opportunity to add to equity exposure within the Royal London GMAP range of multi-asset funds noting that its contrarian sentiment indicator had hit its most oversold since April.
“We bought stocks aggressively during weakness in the first quarter of 2018 and de-risked the GMAP funds again heading into the early summer as markets recovered, taking emerging market equity and commodity exposure underweight,” he said.
“Investor sentiment may be starting to falter once more but we would see October volatility as a potential buying opportunity for stocks.
“With fiscal policy loose in America, interest rates low elsewhere in the world and China easing policy to offset trade war fears we expect the economic expansion to continue into 2019.”
Greetham added: “Investors should be fearful when others are greedy and greedy when others are fearful.”
Yet, while some are using the opportunity to snap up bargain, AJ Bell’s investment director Russ Mould said that markets have not been particularly volatile so far this year.
“Although Wednesday’s 3.3 per cent fall feels frightening, it is only the 10th daily open-to-close movement this year of between 2 per cent and 5 per cent," said Mould. “That pales next to 55 such daily rises or falls during the crisis of 2007 and 2008, or even the 34 such intra-day gyrations of 2011, when US debt was downgraded and the Greek debt crisis began to simmer.”
Mould said one of the “most startling features” of global equity markets this year has been how calm they have been, which historically has been when markets tend to do best.
Source: AJ Bell
He said markets are currently in a period of total calm where headline indices do not gyrate as they make steady consistent upward progress.
“The question now is whether we are about to start moving through the gears, as we did from 1997 to 2000 and then 2005 to 2007, as calm gave way to doubts, nerves and then panic,” he said.
“The good news therefore is that low volatility has tended to be good for equity returns, as shown by 1995 to 1998 and 2003 to 2005, for example. Nor does rising volatility stop markets, as 1998 to 1999 and 2005 to 2006 suggest.”
However, Mould warned that low volatility can also be “bad news” with unusual calm leading to higher risk-taking.
This, he said, can leads to over-exuberance, poor capital allocation and, eventually, the return of volatility “with a vengeance” as poor or over-valued investments “falter and confidence finally cracks”.