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Stock markets plunge - correction or Armageddon?
06/02/2018 , John Evans, International Editor

Suddenly, the global stock markets are a dangerous place to be. Wall Street’s plunge by 1,175 points Monday, as measured by the DJ industrial Average, was followed by a freefall by stocks in Asia, with the Nikkei, Hang Seng and Sydney ASX indexes losing between 4.7 percent and 2.6 percent.

The Dow’s 4.6 percent drop, its sharpest one-day fall in six years, was associated with concerns that the Federal Reserve will raise interest rates faster than expected, after strong growth in US jobs. The latest Wall Street fall follows its decline of 666 points last Friday.

Is this a correction, an especially violent flash crash, by an increasingly exuberant market – or something more ominous?

The Dow had soared more than 40 percent since President Trump's election, a period that included an impressive nearly 20 percent rise in the S&P 500 for 2017 and the fastest start ever to a year in 2018.

So there were any number of specialists quick to reassure investors that this was all just a blip on the way to even higher stocks.

Swiss banker Beat Wittmann, partner at Porta Advisors, declared that a "correction is healthy and needed in order for the Dow to hit 30,000."

True, this is technically not a true correction by stocks as of yet. Analysts pointed out a correction is defined as a 10 percent drop from the prior market peak. The Dow is down 8.5 percent from its recent record level.

Meanwhile, UBS rushed out a research note under the headline, “From overdue to overdone?”

“While the speed of the market declines over the past week is jarring, market declines of this overall magnitude are not uncommon,” according to  the Swiss bank. “Over the past 40 years, US stocks have averaged a 10.6 percent peak-to-trough intra-year decline during bull markets. And the positive fundamental backdrop of above-trend global growth and healthy corporate earnings remains intact.”

It added, “In our view, risks of the Federal Reserve raising interest rates too quickly and triggering a US recession over the next two years appear very low. Meanwhile, the median S&P 500 return in non-recessionary years since 1960 has been 15 percent. 

“That said, markets are likely to remain volatile in the near term. A single-day decline as sharp as Monday's could force further selling as some systematic strategies are forced into deleveraging, and other investors face margin calls, before longer-term investors such as pension funds begin to rebalance and buy the dip.”

While volatility may persist in the very near term, UBS concluded, “we remain confident that the bull market remains intact. “

But one voice stood out with a differing view amid the chorus of reassurance. Tony James, chief operating officer at private equity giant Blackstone, told CNBC that stocks could see a bear market this year.

"I think you could easily see a 10 to 20 percent correction sometime this year," he said. "We've got five [percent] already."

Finally, pity the poor investors who have long positions in both stocks and Bitcoin. The cryptocurrency fell as much as 23 percent on Monday,  losing nearly $18 billion while Wall Street fared even worse as Dow stocks alone lost more than $300 billion.
 

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