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Updated February 07, We have been talking about this for the last 12 months: When will stock markets adjust? Are we approaching the next big market crash?
When will the bubble burst? A little more than a month intothe Dow Jones industrial average suffered its largest drop by volume in history on February 5. What is even worse, the CBOE VIX index, which tracks market volatility and which was displaying worrisomely low levels, marked its biggest single-day jump of all time 84 per cent.
Only one week ago, the financial press was reporting "confidence" and "optimism" at the recent World Economic Forum annual meeting in Davos. Major geopolitical risks remain — it was said — but overall the world economy will display significantly higher growth rates than in the past, possibly dominated by Asia, in general, and China in particular. The scary thing is that the Davos participants reached the same conclusion about the world economy in January First of all, market adjustments of the magnitude just suffered are not unseen in financial markets.
Between andthe Dow Jones suffered declines of 4 per cent or greater 37 times — that is more than once a year. Even considering the period following the financial crisis, the Dow has declined more than 4 per cent once a year.
The Nasdaq index is even more volatile: And after the financial crisis, the Nasdaq suffered similar such negative returns on 52 occasions. More importantly, we have not had important economic news which would justify an impending market crash. Panics happen when markets rise irrationally, as happened during the dotcom bubble. All market participants, even if marginally informed, should be aware that market performance in was stellar and in line with corporate earnings and expectations of future growth.
I believe a severe market correction will be associated with either geopolitical events, such as wars or terrorism, or to decisions of economic policy that will not be welcome by financial markets. Neither one has happened. Besides Donald Trump's tax reform which should benefit company earningsthe US administration has not made any other big decisions yet.
Finally, the fundamental properties of both the companies that saw a sell-off in their stocks as well as the wider economy, remain solid. We are returning to positive and significant economic growth rates, fuelled by Asiabut also accompanied by good perspectives in Europe and the United States. Corporate trading economics chinese stock market are excellent, with reports that profitability in trading economics chinese stock market US corporate sector were at their best in the last 17 years.
On average, 78 per cent of all companies had beaten market expectations regarding earnings growth. The price-earnings ratio, which is a measure of how expensive stocks are and indicates whether stocks are overvaluedin most markets has only been slightly higher than the historical average — and much lower than it was in Does this mean that we should expect a rapid market readjustment and that we will enjoy a happy and bullish stock market in ?
The major risks of the world economy remain: China and its massive private debt levels; geopolitical risks, such as tensions between the US and North Korea; increasing levels of income inequality and the potential for subsequent social unrest; and terrorism as a source of global instability. Stock markets are not necessarily pricing such risks — so, if and when they materialise, we will have our serious crash.
Originally published in The Conversation. First posted February 07, If you have inside knowledge of a topic in the news, contact the ABC. ABC teams share the story behind the story and insights into the making of digital, TV and radio content. Read about our editorial guiding principles and the enforceable standard our journalists follow. It turns out many Australians are still confused about what can and can't be recycled. So why not test your general knowledge with this quick quiz.
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