When it came, the correction looked brutal: $4 trillion wiped off global stocks in a single day.
But let’s not get carried away here. This was a correction rather than a rout whatever the newspapers might have us believe.
The Dow Jones is still up 21 per cent compared with the same time a year ago. The FTSE 100 has seen more serious losses. Investors saw their entire gains over the past twelve months wiped out by lunchtime on Tuesday. The FTSE 100 stood at 7,181, 0.03 per cent lower than on 6 February 2017.
Germany’s Dax was even worse off, down 7.32 per cent compared with a year ago, but it has been selling off for the past fortnight. By contrast, France’s Cac-40 remains 7.79 per cent higher compared with a year ago.
So, what does this tell us? Not a lot really. The Dow Jones might have lost 1,175 points on Monday, which clearly looks dramatic and was guaranteed to make headlines — but it only takes it back to where it was around 7 December 2017.
When good news is bad news
What is rather odd is that the sell-off was prompted by what would normally be considered good news.
The US Labor Department revealed wages grew by more than expected in January compared with a year earlier. US 10-year Treasury yields rose to a four-year high on the US jobs data. But this spooked investors who sold on Friday and then again on Monday.
Fundamentally however, they may have had little cause. There is no evidence as yet that higher wages in January will feed through to inflation, forcing the US Federal Reserve to hike interest rates faster than it plans to, even if the US is at full employment.
There is no evidence that the US Fed plans to accelerate cuts to its bond buying programme, either. And in fact, rising bond yields reflect increasing confidence in both the US inflation and economic outlook.
At the same time US economic growth, while good in 2017, wasn’t rampant and the White House’s GDP target for 2018 is a fairly modest - by historic standards – 3 per cent.
Talk of a US economic boom was almost certainly overdone when compared to the late 1990s or even 2004, 2005. In all likelihood, the US will experience solid, if not spectacular, growth this year.
As this column has observed before there has always been a lot of money sloshing around the global financial system looking for a home since the financial crisis and the introduction of quantitative easing, which led bond market yields to plummet in the first place.
Corporations and investors were for years accused of hording cash. As confidence returned, equities markets were flooded.
Return to normal
So the near 1,200 point plummet on the Dow on Monday looks like quite the over-reaction unless, of course, equities were overpriced in the first place because of all that extra money that had found its way into stocks.
Meanwhile, there’s little reason for European - or even Asian - markets to follow Wall Street lower given the Dovish remarks of European Central Bank President Mario Draghi on Monday.
What, then, is the lesson from the past few days? It is that the patient is still recovering and remains in a serious but, hopefully, stable condition.
The path to full recovery, to normal market conditions, remains a long one. And there will undoubtedly be further bumps in the road. The impact of the White House’s tax reforms is yet to be felt in both the equity and bond markets and they could, in fact, slow quantitative tapering by the US Fed down.
But looking at some of the comments from market analysts what is also clear from the past few days is that the financial crisis continues to cast a long shadow over markets.
Some of us had perhaps started to kid ourselves that we were within reach of normal market conditions. In actual fact, we’re still a long way away.
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