Wall Street has reportedly ended an “era of tranquility” and have plunged into an age of instability amid the recent selloff.
A higher Friday close for New York stocks following a week of “vol” induced selling, lifted markets in Asia and Europe, helping MSCI’s all-country index rise off four-month lows, while European shares firmed 1.4 percent after touching six-month troughs last week.
Wall Street’s equity volatility gauge, the VIX - the spike in which had kicked off the ructions - was at 26.5 percent, easing off Friday’s 29 percent close.
While the index had rocketed to 50 at the height of last week’s turmoil, current levels are well above the long-term average around 11 percent, in a sign that investors’ nerves are still jangling.
The "question investors are trying to answer is how much of the sharp drop in share prices is due to a technical reaction driven by a much-hyped niche in the market that bets on volatility, versus part of a broader adjustment to a different economic reality," the Financial Times reported.
“The system has changed,” says Jean Ergas, head strategist at Tigress Partners, who said the market had made more of a “rethink” than a correction. “This is the unwinding of a massive carry trade, in which people borrowed at zero per cent and put money into stocks for a yield of 2 percent,” Ergas told the FT.
Other experts have similar theories.
“Inflation fears running back into the market and hitting basically all assets in a market that had run up significantly is a pretty plausible, simple story,” says Clifford Asness, co-founder of AQR Capital Management.
In times of such market trouble, other look to the Oracle of Omaha's wisdom.
“As the volatility picks up and the indices plummet the rumours start to swell,” says Michael Arone, chief investment strategist at State Street Global Advisors. “Folks are wondering the classic Warren Buffett line about when the tide goes out, you see who is not wearing swimming trunks.”
Meanwhile, others consider the law of gravity.
“People had forgotten that stocks don’t just go up,” says Adam Sender, head of Sender Company and Partners, a hedge fund. “Corrections are a normal process. This was inevitable. Interest rates rising was the trigger, but short-volatility was the fuel.”
Others were less confident. “This is not yet a major earthquake,” said Lawrence Summers, U.S. Treasury secretary under President Bill Clinton. “Whether it’s an early tremor or a random fluctuation remains to be seen. I’m nervous and will stay nervous. [It is] far from clear that good growth and stable finance are compatible.”
World shares climbed half a percent on Monday, attempting to brush off fresh rises in global bond yields while equity futures also pointed to a firmer session on Wall Street which suffered its worst week in two years, Reuters explained.
“People are nervous after the shock of the past week but it doesn’t feel like there is a crisis around the corner. But never say never,” said Grant Lewis, head of research at Daiwa Capital Markets in London.
Given solid world economic growth, Lewis said the falls were more likely a wobble than a full-blown correction to the nine-year long equity bull market as bond investors priced in an improved economic outlook.
“Even at 2.90 percent, 10-year Treasury yields are still low,” he added.
The nation's economy is very strong, and the tax cut bill is energizing business, so the stock markets will be "just fine," despite record drops this past week, economic analyst Larry Kudlow told Newsmax TV Friday, and he'd buy and hold stocks as they grow cheaper.
"Investment profits are very strong," Kudlow, the Reagan administration economist who also advised President Donald Trump's campaign, told "Newsmax Now" guest host Kirsten Haglund.
There is some interest rate turbulence as well, he continued, but "people shouldn't panic," said the radio host of "The Larry Kudlow Show."
"Stocks are gonna be cheaper and I'd buy them as they go down," said Kudlow, a Newsmax Finance Insider.
(Newsmax wire services contributed to this report).
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