This could be a precursor to a bigger adversity ahead or it may not, the jury is out but let's assess a few things this is hinging on:
(1) Rates, rates, rates- its all about rates ! So far with signs of impending inflation (rising wages data) , the Fed seems resolute on making 3 rate hikes this year, but until a week or so ago, people generally never took much notice of it or believe it could happen. So far, the Fed is unconcerned, IMF came out and said the correction is healthy but a 10% wont stop them from their agenda to hike rates. But if this morph into 20%, then my guess is that they would be less hawkish - now the reason why the Fed and central bankers are looking to raise rates is because that is the only lever they have to influence future market moves, its because they do not have that lever when rates were 0%, they had to do QE but there is so much QE you can do. So because of this, the market, even if it recovers, would be more nervous going forwards. Damn if you do, damn if you don't- if you do increase rates, markets will fall, if you don't you lose your monetary policy weapon and you may let the inflation genie out of the bag (but seriously deflation seems a bigger evil).
(2) Compared to 2008, there are more people (including first timers) in equities and the economy as well people have amassed substantial more debt than ever before- so a hike in rates can have a big impact. And don't think that because Australian rates aren't moving anyway, that we are secluded from that threat because when cost of funds go up, our CBAs are also impacted as they borrow quite a bit from the international market.
(3) Sentiment - I think that's bruised , so even if there is recovery in price, weak sentiment will prevail for some time. Some stocks will do well regardless but a majority that had been based on undelivered promises and high PE would like face strong headwinds ahead.
(4) PE contraction - valuation of a company is not based solely on earnings as Price = Earnings x P/E ratio. In a more bearish market, P/E ratio generally contract as it loses it premium it had during the bullish days, so even if the Appens and the Wisetechs deliver on earnings their high P/E afforded by the new market environment will likely contract leading to a lower sp. That's how it had worked in the past and is likely again. This is something the pundits do not really say often.
(5) Skeletons in the closet. Did we know until now (flushed out by this Dow correction) that there is such an instrument out there that bets on VIX dropping - its called inverse VIX , it gained substantially in the second half of last year when VIX was driven down in a goldilocks trading environment of calm and optimism. But all that changed following the correction and we saw VIX shoot up causing the ETF instrument to collapse and unwind. These instruments, alongside algorithm trading leads us to uncharted waters ahead. There may be these sorts of "unknown unknowns" that people generally do not read in the press. And then there are also those that are in the press but most would not have seen it, like this one below
https://www.bloomberg.com/news/arti...nese-company-worrying-the-world-quicktake-q-a
Take care!
