Another big shakeout

Experts have warned that there is likely to be another “big shakeout” in the global markets in the days to come.

Sparked by a decline in the US, stock market indexes around the world have become highly volatile in the past week.

Background

In 2018, the Dow Jones reached an all-time high of 26,000. However, soon afterward, the stock market began to decline. In February, it witnessed its steepest fall in six years. The decline was mainly due to large US tech companies like Google, Exxon Mobil, Apple and Chevron reporting weak earnings. In the immediate aftermath global markets around the world experienced a sharp decline thus sparking a world-wide sell-off. Stock markets around the world suffered steep falls and nearly $4 trillion were lost within just days.

On February 8th, 2018, global markets dipped once again. Dow Jones closed 1,032.89 points lower at 23,860.46. The 30-stock index also closed at its lowest level since November 28th. "This whole correction is really about rates. It's really about inflation creeping up. It's really about people thinking the Fed is either behind the curve or actually has to be more aggressive," Stephanie Link, global asset management managing director at TIAA.

Analysts have blamed a number of factors of the sell-off including stock market correction and the underperformance of top American companies like Alphabet and Apple. Experts have also stated that it could be a result of algo trading. Experts have stated that the markets, which had been enjoying a robust climb, have entered a correction.

Analysis

Even as markets continue to rally after experiencing steep declining in the recent days, experts have noted that there is likely to be another big “shakeout” in the near future. Analysts have cautioned their clients to remain vigilant and prudent as they think there will be more volatility in the days to come. 

Bob Prince, co-chief investment officer at the $160bn US hedge fund Bridgewater, told the Financial Times on Monday (paywall), “There had been a lot of complacency built up in markets over a long time, so we don’t think this shakeout will be over in a matter of days. We’ll probably have a much bigger shakeout coming.”

His statements come just as global markets have continued to recover lost ground in the recent days. On February 12, 2018, South Korea’s Kospi was up 0.9% while Hong Kong put on 0.8%. The Australian market also recovered on Monday. India’s stock market indices, Sensex and Nifty both ended on a higher note. The BSE Sensex was up by 295 points and ended on 34,300. Wall Street is expected to rise by 0.7% as investors continue to rally.

Despite warnings regarding the future volatility of stock markets, economists have noted that selling would continue. David Bassanese, the chief economist at BetaShares Capital in Sydney said, “History suggests the depth of corrections – assuming the underlying bull market persists – don’t usually get beyond 15%, so there’s certainly some scope for market weakness before a bottom is reached.”

Devendra Nevgi, Founder and Principal Partner, Delta Global Partners, told IANS that Indian markets should brace themselves for the coming week. He told IANS, “The markets next week will focus on earnings, macro-data and, of course, global cues. The global markets remain volatile, which might spill over to Indian markets. FPIs (Foreign Portfolio Investors) have been net sellers, hence support from DIIs (Domestic Institutional Investors) remains important in event of global volatility.”

US bond yields and higher inflation rates have been narrowed in as one of the causes for the decline. Chris Weston at online trader IG said on Monday: “A massive buildup in market leverage has been partially unwound in the blink of an eye and what started as systematic funds selling out of equity and futures positions, as implied volatility headed higher, has morphed into something far more broad-based incorporating many other market participants.”

Assessment

Our assessment is that it is still unclear if this is the beginning of a bear market or if it is merely a correction. If there is another steep decline, then a bear market would become more likely. Experts estimate that markets will be able to recover from a correction in a matter of four months. However, if stock markets continue to decline, then it could take as much as 22 months for it to recover. This would have a dire effect on economies around the world.