Wall Street Rally Picks Up Pace; Looking Like A Correction, Not A Crash


Tuesday, February 06, 2018  04.20PM / GuardianUK / TheAnalyst 

Instead of sinking into the mire, the Dow is now up 350 points, or 1.4%. That means leading shares have recovered around a third of Monday’s tumble. 

Although the
Dow Jones industrial average gets a lot of attention, serious stock market traders pay more attention to the S&P 500. 

That’s because it contains more companies (500, instead of the Dow’s 30), so it’s a better measure of the actual US stock market. 

And after an early wobble, the S&P 500 is now positive too -- up 1% or 27 points at 2,676 points.


Experts Wade In 

The White House, and specifically the recent tax cuts, have played a part in the current market volatility, says Royal London Asset Management:

US stock market volatility continues to spike higher as the strongest wage inflation in the US since 2009 triggered fears of faster than expected rises in interest rates. While Donald Trump’s White House has correctly pointed to strong economic fundamentals as a more important long term story and the role of the tax cuts in driving this, they’ve failed to appreciate the impact that their policies could have on inflation, and therefore the path of interest rates.

Royal London’s head of multi asset Trevor Greetham added:
Investors welcomed the announcements of tax cuts but are starting to get second thoughts as the consequences of adding stimulus late in the business cycle become clear. Unemployment is low and the potential for strong wage inflation once US tax cuts take effect has spooked markets, given what this means for US interest rate policy. 

Although rising interest rates pose a challenge to the stock market, this will only become a serious one once they are high enough to cause the economy to roll over. With the Fed Funds rate still below the level of core inflation in the US, that could take quite a while.

We expect bouts of volatility like this to become more common now the Federal Reserve is in play, but expect stocks to recover over the coming weeks and months, making recent market moves look like an overreaction.

The early recovery in US markets gives some credence to those who believe the recent falls were a much needed market correction rather than the precursor to a wider sell-off. One of those is Sven Balzer, head of investment strategy at Coutts:

This week’s stock market falls show a much needed market correction after a long period of strong performance, and little more. Global economic growth remains strong and there are no signs of a US recession, which usually heralds a wider sell-off...

In our view, this is a short-term correction driven by technical factors rather than concerns about the underlying economic picture or corporate health. While this can be unnerving for investors, we see a robust economic and corporate environment that should continue to support equities.

As at Press Time 4.19PM
The Dow is all over the place. After the initial 550 point fall and the subsequent 350 point rise, the Dow is now up just 50 points. What it will close at is anyone’s guess, but the recent falls do seem to have attracted some buyers. Neil Wilson, senior market analyst at ETX Capital, said: 

The valuations were certainly looking attractive on a forward earnings basis, providing attract entry points for a number of stocks. Some deep-pocketed funds may have stepped in to hoover up what they could – in this context it looks for the time being like the correction was exactly what the market needed – although we have a long way to go today still and sentiment is still fragile after two bruising sessions.

Elsewhere, the Vix volatility index has fallen back sharply (ironic, given how volatile the Dow is at the moment). After hitting a level of 50 earlier, the Vix is now down 33% on the day at 24.7.

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