Wall Street collapse: is the world facing a new stock market collapse?

Realnoe Vremya experts advise not to jump to conclusions about a systemic crisis on the stock market

The U.S. stock market suffered the worst day in the last few years on Monday: major stock market indices have shown a record-breaking drop since 2011, and investors lost tens of billions of dollars in one trading session. By Tuesday, pessimism seized the Asian and Russian markets. However, experts advise not to jump to conclusions about a crisis: apparently, overheated US market has entered a short phase of correction. Read the details in the material of Realnoe Vremya.

Wall Street is not in the mood

February 5th, 2018 was another ''black Monday'' for US investors and large businesses: the trades closed with the drop the market has not seen for several years in a row. Main US stock indexes fell by a few percent at once: S&P 500 lost 4,1%, Dow Jones – 4,6%, it is a record drop since 2011; Nasdaq also dropped — by 3,8%. In the course of trading on Tuesday, the US market also fell, but less significantly.

The fall of US indices began last Friday, but the Monday collapse, according to world media reports, ''ate'' the entire cumulated increase since the beginning of the year. By Tuesday, the nervousness reached the Asian markets: Nikkei (Japan) fell by 4,7%, Hang Seng (Hong Kong) — by 5,1%. European indices were also falling several sessions in a row.

The Moscow exchange index on Monday-Tuesday was in the general negative trend, but its pessimism affected investors to a much lesser extent: on February 5th, the index decreased slightly — by 0,2%, on February 6th — by 1,7%.

The collapse of the US market has also hit the world's richest people. According to Bloomberg, on Monday they lost over $114 billion. For example, billionaire investor Warren Buffett lost $5,1 billion, Facebook founder Mark Zuckerberg — $3,6 billion, Amazon founder Jeff Bezos — $3,3 billion. The capital of Larry Page and Sergey Brin, who stood at the origins of Google, decreased by $2,3 billion.

The chronologically record drop of US markets coincided with the taking the office of new head of the Federal Reserve System (FRS) — Janet Yellen, who led the Fed Reserve for 4 years, has recently said goodbye to employees, and on February 5, Jerome Powell took the oath.

The chronologically record drop of US markets coincided with the taking the office of the new head of the Federal Reserve System (FRS) — Jerome Powell. Photo: offshoreview.eu

The system gets overheated

Most experts note that there are no systemic reasons for a crisis on the stock market — the US economy steadily grows, the Eurozone also doesn't cause alarm. Apparently, the last drop has been due to some overheating — for a long time the market was growing at a great pace, now it is the phase of correction.

Many experts also tells about the reaction of investors to the expected increase in interest rates — it is expected that the fed at the meeting on March 21 will decide to raise the base rate (now it is 1,25-1,50%). The last time the rate rose in June, at the first meeting in 2018 it was decided to leave it unchanged.

Besides, on Friday it was published the data on U.S. labour market, which showed that unemployment in the country is at the lowest level while wages in annual terms increased by almost 3% (the growth of wages can also affect the base rate of the fed and the profitability of companies).

''This is the expected incident''

There are no apparent fundamental reasons for further fall of the stock market as the macroeconomic situation in the United States and the rest of the world is in good shape. Given that the market has seen rapid growth in recent weeks, there is a correction in the current fall — an attempt of the market to regulate such a rapid growth, says Felipe De La Rosa, portfolio manager at General Invest for international markets.

According to him, in January S&p 500 entered the ''overbought'' zone according to the RSI index, the last pullback brought it closer to the ''oversold'' zone. A slight continuation of the correction is possible, but we see strong support at the levels of 2534-2649 points for S&P 500, he adds.

''In fact, the collapse on the stock exchange is an expected incident: analysts were saying that a bubble was inflating on the stock market for almost a year and predicted the inevitable collapse,'' says Mikhail Portnoy, the director of the Institute of the USA and Canada at the RAS and expert in US financial system.

At the time, the money that the fed threw into the economy largely passed the real sector, settling in the stock market. Now, according to Portnoy, it is time for redistribution. The US economy is showing good growth rates, unemployment has decreased while employment and wages have increased, he enumerates. This can be seen as a signal that the real sector has good prospects, perhaps financial flows are directed towards production.

''Most likely, we are talking about a short-term correction. There are no reasons for serious problems in the market because the economy is really going up, and against this background a systemic exchange crisis would be unnatural,'' Portnoy says.

By Artyom Malyutin

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