Oops, a correction, but don’t panic
The bears are too early
In the stock market, investors who speculate on price falls are affectionately called “bears”. In nature, real bears go into their dens as soon as it gets colder and only come out again in the spring. Meantime, they hibernate. It may have something to do with climate change, but this winter’s stock market shows that the bears have already completed their rest period well before the start of spring. After all, corrections usually only occur from March onwards.
Dark clouds above the market
Unexpectedly prolonged inflation, central banks turning off the money tap everywhere, and gunfire at the Ukrainian border have been a little too much for many investors in recent weeks. The stock exchanges had already started the year in a bad way, but on Monday evening they started a steep slide. The NASDAQ slumped to a loss of more than 18 percent from its November peak. Also, the S&P 500 was more than ten percent in the red at one point. This was a real correction. We hadn’t seen that in a long time.
Volatility through the roof
The CBOE Volatility Index – the best-known fear indicator – even briefly touched 39. We had not seen that level since the pandemic broke out in early 2020. Panic on the stock market? Perhaps for a while. What was remarkable, however, was the lightning-fast recovery. In the course of the – for us – evening, the indices recovered remarkably fast. Led by a recovery in Bitcoin. Are cryptocurrencies suddenly leading the stock market? What we then saw was a recovery in the NASDAQ from a loss of more than 4 percent to a plus at the close. Rarely seen.
Total sell-off
Was this the infamous total sell-off that usually marks the end of a correction? Prices that set a new low during the day and then closed the day higher than the opening? Typically, the sign of the end of the correction? Or should investors take more price falls into account in the coming period? All eyes are on the Federal Reserve meeting today and the further course of the tense situation at the Ukrainian border. Both could have a significant impact on stock market sentiment in the short term.
No nervousness
The question is, however, whether long-term investors should become very nervous about this volatility in the stock markets. It is true that the prices on the stock market have been moving quite a lot in recent weeks, but this volatility does not seem to be spreading to other – more important – markets for the time being. In particular, there seems to be a spirited revaluation in the stock market, with everything with a higher risk being brought back down to earth for a while. Technology companies with too much imagination, Meme-stocks, and cryptocurrencies were the main victims.
No movement in currencies and bonds
But the most significant markets – those of the dollar and bonds – remained remarkably motionless. One would expect more movement in interest rates in the run-up to a tightening Federal Reserve. Nothing of the sort. What was remarkable was the ease with which the US government issued new 2-year Treasuries. The interest rate even dropped below 1 percent again. The interest surcharge on higher-risk corporate bonds barely rose. Are these signs of great concern? And the dollar? It hardly moved at all. Anxiety in the markets ahead of one of the most important meetings of the US central bank ever? And what about the Russians, who are bringing their tanks into action?
Safety belts
Meanwhile, the quarterly figures season is in full swing. The results have not been too bad so far. A 22 percent jump in profits is expected for the companies in the S&P 500. Companies are not failing so far. Of course, the big ones (Apple, Microsoft, Alphabet, Amazon, and Tesla) are still to come, but so far so good. Profitability is not the issue. It looks like a reappraisal of risk is taking place on the stock market. Now that the central banks seem to be turning off the money tap, investors are becoming less euphoric, and this is clearly visible in some places. But as long as interest rates – in real terms – are still negative and profitability is satisfactory, investors who have done their homework properly do not have much to fear. Yes, they should tighten their seatbelts for a while, though
