October has been a poor month for investors. Nervousness set in after the US Federal Reserve raised interest rates, as expected, in September but spoke quite firmly about the need to increase rates by more. At the same time, the yield on three-month US Treasuries (a proxy for cash) rose above inflation for the first time in a decade. US investors, if not the rest of us, now have other options for investing, apart from in equities.Higher interest rates themselves are not necessarily a problem if economies are growing strongly, but together with the reversing of quantitative easing in the US (the Fed is reducing its stock of purchased bonds), does represent a tightening of liquidity conditions. This means less “firepower” to keep buying equities. At the same time, higher bond yields have increased the discount rate applied to future company earnings, thereby reducing their present value. This has put downward pressure on the share prices of highly rated growth stocks. Meanwhile, economic growth (outside the US at least) has been slowing, while many companies are experiencing higher costs as wages rise and energy prices go up. Source Quilter Cheviot.
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