Saturday, August 22, 2015

Is this Week’s Massive Stock Market Sell-Off Such A Bad Thing?

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.