Stock market crash or healthy correction?

PARIS: The dramatic fall in stock prices on Wall Street that spooked equity markets around the world on Tuesday is making investors nervous that this could be the start of a new stock market crash.

But the underlying strength of the global economy seems to suggest that the sell-off might be actually just a temporary—but long-overdue—correction to a more or less uninterrupted market rally since Donald Trump was elected US president in November 2016.

On Monday, New York’s Dow Jones Industrial Average saw its steepest ever one-day point drop, shedding 1,175.20 points, or a hefty 4.6 percent in value.

That has triggered panic in Asia and Europe, where stock prices fell sharply on Tuesday.

“We haven’t seen swings of such magnitude for a long time, and in that sense, it’s traumatic,” said Jean-Francois Robin, bond strategist at Natixis.

“Lots of investors have become unaccustomed to so-called ‘bear’ markets,” he added.

The downturn began on Friday, when bright US non-farm payrolls data sparked fears that inflation would surge this year—and that the US Federal Reserve (the Fed) would be forced to raise borrowing costs more quickly than anticipated.

At the same time, US Treasury yields shot to four-year peaks, as bonds become more attractive for investors than stocks.

Behind all this were concerns that central banks could start to wind down their ultraexpansive monetary policy measures more quickly than anticipated.

“Protected by central banks’ generosity, investors have got used to low borrowing lates, low inflation and an absence of volatility,” said Jean-Louis Mourier, economist at Aurel BGC.

‘Herd instinct’

The current configuration of the market tends to “favor the herd instinct, which can partly explains the ferocity of the sell-off,” Robin said.

But optimism still holds the upper hand, at least for now.

“We can say it’s a correction, but I don’t believe we’re witnessing large-scale panic,” said Jean-Laurent Bonnafe, head of BNP Paribas at the bank’s annual news conference.

For many analysts, the current bout of selling fever is primarily a matter of “market psychology,” said Christopher Dembik, chief economist at Saxo Banque.

But it is the scale of the current sell-off that is putting investors on edge. Because of this, what happens over the next few trading sessions will prove crucial.

“Markets sometimes have a tendency to create their own reality,” said Vincent Juvyns, strategist at JPMorgan AM.

The pick-up in inflation and the rise in bond yields were already making investors jumpy and so the US jobs data last Friday could have just been a convenient excuse to start selling, he said.

“Objectively, the conditions are not in place for a real crash,” Juvyns said.

“From an economic point of view, nothing has changed. On the contrary, the latest indicators confirm that the global economy remains robust,” he added.

‘Healthy correction’

Markets “are still traumatized by the events of 2008, the worst financial crisis since the 1930s,” Robin said. “But we’re not in 2008.”

“There is no reason to panic. Corporate earnings are on the rise. Business indices are at their highest levels in decades,” he added.

At the current juncture, a stock market correction is “actually rather healthy,” Robin argued.

That view is shared by many market players, with the US Standard & Poor’s 500 in January putting in its best start to the year since 1997.

Mourier suggested that investors “are finding out that assets regarded as risky, such as shares, are just that.”

Investors were being reminded that “inflation and volatility haven’t disappeared, and central banks won’t always be there” as a backstop, Robin said.

Nevertheless, the current correction “offers new opportunities,” he added.

“The shares in the (French) CAC 40 index, for example, aren’t expensive, particularly in view of the outlook for corporate earnings and economic growth. It’s actually more of an opportunity to buy shares,” Robin said.