Global Equity Market Correction

History of Sharemarket corrections – An Anatomy of equity market corrections

/ Kiwi Investor / 10 Comments

There has been lots written placing the current US stockmarket correction into a historical context.

The analysis of this blog draws on recent analysis undertaken by Goldman Sachs.

As you know, 2018 started out as the strongest start for global sharemarkets in over 30 years. The S&P 500 was up over 7% at one stage during January 2018.

The US equities bull market has been going since March 2009. This is amongst the longest period in history without the US sharemarket entering a bear market. The US sharemarket is up over 300% since 2009.

A bear market is usually considered to have occurred when sharemarkets fall by more than 20% in value.

A sharemarket correction is a fall in value of between 10% and 20%.

Volatility was at historically low levels over 2017. The US sharemarket, as at the end of January 2015, was up for 15 consecutive months and endured the longest period since 1929 without falling in value of more than 5%.

The fall in early February ended 499 trading days of the market not incurring a fall in value of more than 10%, which is amongst the longest stretch in history.

Records have been set and then broken!

 

With regards to bear markets and corrections, Goldman Sachs had some interesting analysis.

Corrections

There have been 22 corrections since 1945 of over 10%, and many more of less than 10%. The average correction is 13% over 4 months and takes 4 months to recover.

Bear Markets

There have been 14 bear markets, the average fall in value is 30% over 13 months and take 22 months to recover.

 

My own thoughts

Generally a bear market (i.e. 20% or more fall in value) does not occur without a recession (a recession is often defined as two consecutive quarters of negative economic growth).

The key forward looking indicators, such as an inverted yield curve, significant widening of high yield credit spreads, rising unemployment, and falling future manufacturing orders are not signalling a recession is on the horizon in the US.

Therefore, if you are playing the odds, the current correction might have further to run but it is unlikely to turn into a bear market.

 

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Equity Market declines in Perspective

/ Kiwi Investor / 3 Comments

Far from Unprecedented: Nine Selloffs Like this, and Nine Rebounds.

The Bloomberg article has much prettier graphs than I can do, but I can provide the view from a wonderful ski field in New Zealand, in the spirit of the Winter Olympics, Treble Cone near Wanaka.

150

 

So, since the beginning of the bull equity market run in 2009 there have been nine significant declines in global equities. On each occasion global equity markets have come back.

The nine episodes are outlined in the Table below. They make for interesting reading and are distant memories.

Now of course we maybe only partway through the decline of the current “correction” and it could be different this time i.e. no bounce

 

Market movements are in relation to the US S&P 500 Index.

Date Level of Decline Trigger
January 2016 -11% of three weeks Concerns over economic slowdown and mounting Chinese debt
August 2015 -11% over six sessions China’s shock devaluation of the Yuan
October 2014 -5.0% over week Spread of Ebola virus, concern over end of US Quantitative Easing and tensions in the Middle East
January 2014 -3.6% over the month Emerging markets equities and currencies sold down
October – November 2012 -7.2% US Election uncertainty between Obama and Romney
March – June 2012 ~-10.0% US Federal Reserve indicating it will likely hold back on further monetary Policy easing e.g. Quantitative Easing
July – August 2011 -17% US Credit downgrade and weaker than expected jobs report, Greece
January 2010 -8% Market correction uncertainty as to global growth outlook, particularly Europe
April – July 2010 -16% Similar reasons and the infamous flash crash
January 2018 -10.1% Rising longer dated interest rates, inflation concerns, Fed tightening, negative feedback loop of short volatility Products

 

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Equity Markets Keep Falling

/ Kiwi Investor / 3 Comments

The equity market volatility from last week continued into this week.

The Dow Jones has experienced its worst week in two years. US equity markets reached “correction” territory (a decline of 10% from the peaks in January).

Concerns over higher longer term interest rates and a more aggressive Federal Reserve Fed Funds Rate tightening path than expected are the backdrop to the recent downturn in markets.

It also appears that the short VIX (volatility) products significantly added to market volatility. A good explanation of how these inverse volatility products impacted on market volatility can be found at $XIV Volpocalypse – A Sea of Disinformation and Misunderstanding

The US inflation number on February 14th has taken on heightened importance and will be the focus of markets this week i.e. a likely source of volatility

What has changed? Not much.

As expected prior to the “market melt-down” volatility was expected to pick up from historical lows and that interest rates would rise over coming months. Albeit the volatility has occurred more abruptly and violently than anticipated (as it often does).

US longer dated interest rates have reached 4 year highs but remain near historically low levels.

The global economy is characterised by synchronised economic growth. It is expected that all 45 of the larger economies monitored by the OECD will experience growth in 2017 and 2018. It has been a while since this has occurred. In the US unemployment remains at near historical lows and financial conditions remain supportive of ongoing economic activity. US equity markets are still up over 10% for the last 12 months.

It is a good idea to go back to what was being said prior to a large market event.

The comments by Mohamed El-Erain, the chief economic advisor at Allianz, at the Inside ETFs conference 23 January 2018 are a good reference point for the current market situation.

El-Erain told the conference we are not in an asset bubble but that we should expect a higher level of market volatility in 2018. Mohamed El-Erain: We’re Not in a Bubble

His comments focussed on the fact that the US Federal Reserve (Fed) would continue to normalise monetary Policy in 2018 e.g. lift interest rates over the year to more normal levels while also reducing the size of the Fed’s Balance Sheet.

El-Erain noted 3 key risks for 2018:

  1. Geopolitics e.g. Korea and the Middle East
  2. What happens if the four major Central Banks try to normalise monetary at the same time i.e. Fed, China, Japan, and Europe
  3. A market accident e.g. a liquidity event in say an ETF given an over promise to deliver

The last risk is very insightful given the events of the inverse volatility products over the last 10 days. I am quite sure El-Erain did not expect that risk to materialise so quickly!

 

So if things change, you change your mind, to badly paraphrase Keynes. Not sure that things have changed that much but maybe a realisation interest rates are actually heading higher and the very low level of market volatility experienced cannot last for ever. The US equity market is still trading on high valuations.

Whatever you do don’t panic. The Topic of my next post.

 

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