Stock market dips

THIS week has not been great for stocks. The Dow Jones and S&P 500 have had six consecutive days of straight declines with big plunges on Wednesday and Thursday.

Alarmed headlines have been screaming that this correction is happening thanks to rising interest rates, the trade war between China and the United States, and rising bond yields.

Quite honestly, none of these reasonings are new.

It sure didn’t matter two weeks ago when the Dow was scaling new highs.

What we really should be asking ourselves is whether anything has fundamentally changed for the worse since this fall in stocks started.

Markets got jittery on Wednesday when 10-year treasuries hit their four-year high and are now settled at the 3.173% level.

Investors fret that rate hikes are bad for stocks.

However, Federal Reserve (Fed) head Jerome Powell has indicated that there isn’t much risk of high inflation.

Less inflation probably means less Fed tightening, as inflation is a primary driver of long-term interest rates. For now, signs point to benign prices for the foreseeable future.

Now in terms of trade tensions between China and the US, what new development has there been since last week or the week before? Fears have been ongoing for months that China would retaliate just as fiercely to all tariffs imposed by the US. Even if the US really were to impose a tax on all products from China, this would still only knock off a percentage point of China’s gross domestic product. It’s true that the International Monetary Fund (IMF) has downgraded its global growth forecast.

On Wednesday, the IMF cut its forecast for global growth to 3.7% this year and next year – down 0.2 percentage points from an earlier estimate. The downward revisions mean that the global economy would grow by the same rate for three consecutive years starting 2017. Now, is that so bad?

Stocks are volatile and sentiment is fickle while fundamentals still seem broadly intact. The movements we see today are typical behaviours that happen during matured bull markets.

Bear markets do not happen when economic data is strong and there is plenty of caution and fear in the market. They always happen when everyone is euphoric and the headlines are positive.