Sunday, 14 July 2024

What to expect from the market correction in February?

5 min read

By Angelito Bautista Jr.

Global markets were shocked by a sudden fall in stocks in the first two weeks of February 2018, right after practically hitting new records in the early weeks of the year. Despite this, analysts believe that a correction has just happened and there is no cause for concern.

  • US Down Jones fell by almost 1,200 pointson February 5, its biggest one-day percentage decline since August 2011
  • For experts, what happened to the markets amounts to a correction, the first time since February 2016, often described as a fall of 10%
  • Some are getting worried that the so-called "goldilocks" environment of gradual growth and lower inflation may come to an end

On February 5, the US Dow Jones fell by almost 1,200 points or 4.6%, its biggest one-day percentage decline since August 2011, during the European debt crisis. Four days later, it dropped again by another more than 1,000 points, while S&P500 fell by about 10% from its late January high.

And the rout in US markets rippled around the globe, causing Asian markets to plummet. Amass sell-off spread to China for the first time in the current crisis, with the Shanghai Composite index falling by 5.6% at one stage and the Hang Seng in Hong Kong slipping more than 4% in February 9. Other markets such as South Korea and Australia also felt the effects of the sudden crash.

In the days following the Dow Jones drop, share values recovered strongly only to fall again. Global stock markets ultimately rebounded in the next days, and analysts expect that markets will return to calmer water

For experts, what happened to the markets amounts to a correction, the first time since February 2016, often described as a fall of 10%, rather than a crash, which are generally defined by an abrupt and rapid decline of 20%.

History has proven that stock markets usually make dramatic moves in a short period. After Thursday’s selloff, the Dow closed 10.4% below its January 26th 2018 record high of 26,616.71.

"Global stocks have fallen from peak to trough by more than 10% in two-thirds of the years since 1979, yet most of those times posted a gain for the year,” said Jeffrey Kleintop, chief global investment strategist at Charles Schwab.

Records show that there have only been four 10% stock market corrections since the 2009 recession.

Changing regulatory environment

Many market players still wonder whether the gains will continue or the risks will persist, as they remain on guard for more volatility. For one, people are watching whether major central banks will hike interest rates faster than expected, especially with many changes happening.

For example, if the US economy gets much stronger, it could touch off inflation that could force the US Federal Reserve (Fed) to raise interest rates faster than planned.

Analysts also continue to watch creeping ten-year US Treasury yields, which was on a trajectory to 3%, from its current 2.85%. As yields increase, bonds provide better returns, making them more attractive compared with risky stocks.

Add to that the recent changes at the Fed, with Jerome Powell taking over the chairmanship from Janet Yellen. Even though Powell intends to maintain the strength and resilience shown by the financial system, he still vowed vigilance from the central bank and gave credence to existing risks to the financial system.

The 16th chairman, in a video message posted on the Fed's website, stated that the central bank works to sustain the ongoing economic recovery and oversee some of the nation's largest financial institutions. Powell will need to handle the pressure of market volatility, as well as balancing monetary stability and growth with the Trump administration rolling out massive infrastructure spending while cutting taxes.

And while he is expected to view Fed policy in much the same way Yellen did, Powell is still an unknown person to many in the industry.

In the UK, the Bank of England (BoE) said investors should bet on earlier and more frequent rate rises than previously forecasted, after holding rates fixed at 0.5% last week.

“A further rise in interest rates is likely to be appropriate if all those trends continue and we are on a trajectory. It wasn’t just one hike in November and then we take a very long break,” said Gertjan Vlieghe, a member of BoE’s monetary policy committee.

Now, some are getting worried that the so-called "goldilocks" environment of gradual growth and lower inflation may come to an end. And the fear of faster inflation and interest-rate increases in major markets are putting more heat to the fire.

Keywords: Stock Markets, Dow Jones
Institution: GlobalPlatform
Country: USA, China, Australia
Region: Asia Pacific, Europe
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