Prophets of market doom are jumping the gun
Last week’s turmoil suggests investors are belatedly coming to terms with the end of a decade of cheap money
At one point on Friday, the benchmark S&P 500 equity index was facing its steepest weekly loss since the dark days of the 2008 financial crisis. While stocks eventually found a floor, the index still suffered its sharpest five-day fall since the China-driven sell-off in January 2016. European equities, meanwhile, have just experienced their worst weekly decline since the acute phase of the euro zone crisis in 2011, while the Hang Seng Index dropped the most in a decade.
A staggering US$5 trillion has been wiped off the value of global equities since the turmoil erupted nearly a fortnight ago.
The VIX Index, Wall Street’s “fear gauge”, which measures the anticipated volatility in the S&P 500 and which gave rise to the complex financial products and trading strategies that are seen as the main culprit behind the sell-off, now stands just below 30, above its long-term average of 20 and sky-high compared with its subdued level of 12.7 at the start of this month.
Perhaps more worryingly, the sell-off in stocks is starting to put other asset classes under strain, notably corporate bonds and emerging markets, in a sign that last week’s dramatic price action might be a foretaste of things to come.
Yet the prophets of market doom are jumping the gun.