Have just been re-reading a piece of quantitative research (dated 29 August) from Binky Chadha (Deutsche Bank) who has put together a long term study of equity market corrections. Focus is on corrections that occur outside of recessions. These are relatively uncommon, just 13 in the last 65 years.
Catalysts for the latest bout of uncertainty seem to be from 3 directions:
- No rate hike from the Fed, but the market angst seems to have come from Janet Yellen's concerns about global growth and instability
- Fears of a China slowdown, though it's really about wider emerging markets. We have seen significant selloffs or devaluations in most EM currencies, and EM bond and stock markets are struggling as capital flows out of EM and back to the US
- Commodity price declines are feeding deflationary pressure into the system, which takes pressure of Central Banks to raise rates
This chart shows the Unemployment rate gap versus corrections over the last 65 years:
And this is the executive summary of the DB note: