Markets ended summer on a positive note

FED hinted about slower-than-expected path to rate hikes
Divergence between developed markets and emerging markets persists

August was one more positive month this year. US S&P 500 and European STOXX 600 indexes rose for seven straight months in a row. Naturally investment community starts to expect at least some sort of correction.

According to Ned Davis Research (NDR), more than 210 days have passed without 5% correction in S&P 500 index. During every bull market since 1928, on average there were 84 days without such correction. Ratio measuring 10% corrections currently shows more than a year without one, while historical average is 331 days in bull markets. Historically autumn months are associated with some sort of pullbacks as investors get back form vacations and start to reevaluate their investments. So, it seems, that at least small correction in coming months should be expected.

Investors are closely watching every word of central banks. Any hint of monetary policy normalization could trigger bigger reaction in the markets. Just before the end of August FED chairman Jerome Powell indicated that the central bank is likely to begin tapering before the end of the year, but rate hikes are not imminent as there is still “much ground to cover” before the economy hits full employment. According to him, US economy has reached a point where it no longer needs as much policy support. It is likely that they will begin cutting the amount of bonds central bank buys each month before the end of the year. Overall investors reacted positively to such statement as rate hikes probably will not materialize this year.

World, US small caps and Emerging markets equity indexes

Source: Bloomberg Finance L.P

Nonetheless we still observe divergences in the markets. As large companies push market capitalization weighted indexes to new highs, other midsize and smaller companies are not doing that great. Also, emerging markets, especially Chinese companies are not joining the trend of going up each month but show different tendency of going down as crackdown on companies and sectors hurt confidence of investors, who were deploying their capital in the region and expected larger gains, but were met with increased regulation. Just recently China forbidden players under the age of 18 from playing video games for more than three hours a week by saying, that it needed to pull the plug on a growing addiction to what it once described as "spiritual opium". Such news affected not only Chinese video game makers, but also other companies in the industry, because China is the biggest video game market in the world.

AAII Investor sentiment

According to American Association of Individual Investors (AAII) published survey data. Indexes reflect sentiment of individual investors towards the stock market over next 6 months.
Source: Bloomberg Finance L.P

Current situation in the markets still provides enough evidence to be slightly optimistic, as most major economies are still being stimulated, macroeconomical ratios are inching higher and investors still are willing to take on risk. The spread of COVID-19 Delta variant poses risks, especially when we enter fall respiratory virus season, but the newest research on vaccine booster shows promise to prolong count of antibodies for those who already received COVID vaccines.

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