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Have Equity Markets Become Accustomed to Outside Support?

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Equity markets

We’ve seen a selling spree in the equity markets this month. Through October 26, the SPDR S&P 500 ETF (SPY) has lost 8.7% in the month and is barely positive for the year. Several factors have contributed to this slide, which we’ll discuss later in this series.

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Tech sell-off

Some of the tech companies that have supported the equity market rally over the last few years have plunged in the recent wave of sell-offs. Amazon (AMZN) and Alphabet (GOOG) have fallen 18.0% and 10.2%, respectively, so far this month. Both companies reported underwhelming earnings last week.

The equity markets and the broader economy have received support from central banks as well as governments over the last decade. The highly accommodative monetary policy that we saw in the aftermath of the 2008 financial crisis prevails in several regions. Some analysts have pointed to rising interest rates in the United States as the cause for the recent fall in stock prices.

Government spending

On the fiscal front, most government fiscal deficits are significantly above the levels reported in 2007. The fiscal and monetary policy easing that marked the 2008–2009 timeframe hasn’t reverted to the pre-crisis status yet.

The mini-stimulus in China (FXI) during this period included a tax break on automotive purchases that was revoked at the beginning of this year. While the country’s automotive sales showed strength at the beginning of the year, they have plunged over the last three months. In particular, Ford’s (F) China sales have fallen sharply this year.

Several other factors have been driving this market, which we’ll explore in the next article.

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