Even though the global economy has been fuelled by the “sugar high” of central bank interventions since the September 2008 global credit crunch, is this week’s market sell-off such a bad thing?
By: Ringo Bones
Market commentators offer a range of specific explanations
for the sell-off, including a drop in crude oil prices thanks to a global supply
glut – which will affect the profits of energy companies and crude oil dependent
emerging markets alike – a slowdown in the Mainland Chinese economy that is
becoming more apparent by the day and the credit squeeze in other emerging
markets. But those explanations, while accurate, are only a part of a much
bigger story.
Markets have been priced for perfection since the Reagan
administration and we’re just getting some reminders that the world economy is
far from perfect. The United States stock market, as measured by the S&P
500, is the clearest example. It fell 5.8 percent this week and is now down 4
percent for the year. But that only pulls the overall index down to October
2014 levels. Against a longer time horizon, the recent drop looks more like a
trivial downward bounce within a consistent range rather than something really more
dire to cause an experienced hedge fund manager sleepless nights.
Flat stock markets in 2015 mask what came before: a
remarkable run-up in stock prices in the preceding half-decade. From mid-2009
to mid-2014, stock prices rose much faster than corporate earnings, or gross
domestic product, or pretty much anything else you might think of as
fundamentals. Given that the “fear-and-panic” index in the global markets are
at an all-time high, the panicky day-trader might experience last month’s massive
Mainland Chinese stock market sell-off as a “contagion”. All we can hope for is
that this week’s dip is just a badly-needed overdue market correction.
