Between the end of September and the start of 2019, the S&P 500 dropped over 10%, with almost every trading day in late November and December seemingly ending down.
It may be too soon to tell, but that period seems to have ended the tear that “made the stock market great” again to many in the US and poured cold water over the White House’s favourite signal of national prosperity.
That volatility wasn’t just related to equities, either: based on its most recently reported earnings, Citi reported on Monday revenues from fixed income trading slide by almost 21% in the fourth quarter as secondary activity effectively screeched to a halt through the autumn.
Amid the din that comes when a bear market is ushered in, Wall Street economists are scrambling to accelerate ahead the date of the next US recession, and the consensus on the Street is that all asset classes are looking overvalued.
But what’s truly puzzling about this anxiety attack within financial markets is that the underlying fundamentals are looking as solid as ever been since the crisis. US GDP growth remains at its strongest in years. Unemployment hasn’t been this low since before Nixon was president. In spite of that tight labor market, inflation remains moderate, giving the Fed some space to consider not rising rates too fast.
There are also encouraging signs in bond markets. Spreads are tightening across all fixed income sectors and the deal pipeline is reanimating. US high yield saw its first deal of the year price last week as Targe inked a $1.5bn bond deal via Bank of America, and the CLO market is coming to life again as the loan market has regained its footing.
The end of quantitative easing is going to spell greater asset price volatility as the bid for some of the world’s most trusted assets evaporates, and there may be good cause to fear whether the US economy can endure “normal” interest rates after they were near zero for so long.
But what was really at play in this autumn’s severe volatility was that equities became massively overvalued in late 2017 as retail money moved into stocks late into the rally and investors gained a sense of false confidence as buybacks seemed never to end.
That mini-correction should not be taken to mean that the next recession is just around the corner – and the market is slowly coming to recognize this.