On Monday February 5 in a volatile trading session the Dow Jones Industrial Average dropped more than 1,500 points at one point before closing 1,175 lower – a 4.6% fall and its worst one-day drop since August 2011.
Following a further sharp fall three days later the Dow was 10.4% below its all-time high of 26,616.71, established less than two weeks before on January 26.
The jury is still out on whether the retreat marks simply an overdue correction or the beginning of a longer-term bear market – although this week’s much calmer conditions suggest stock markets may simply tread water over the coming months.
Slow road back
Wall Street’s latest retreat was dismissed as “small potatoes” by Bill Dudley, president of the Federal Reserve Bank of New York. He was right, but the fallout extended to the world’s other stock markets.
While the Dow was 5.2% lower at the end of the week February 5 to 9, Japan’s Nikkei 225 sank by 8.1% over the five sessions – its worst one-week performance since the depths of the global financial crisis in October 2008.
The Tokyo index had climbed to just over 22,800 last October when prime minister Shinzo Abe’s ruling coalition won a snap election – still some way from the all-time high of 38,916 reached at the very end of Eighties, just before Japan’s asset price bubble burst.
In the past week the Nikkei 225 has looked healthier, closing 255 points higher at 21,720 on Friday.
China in sync
How has the stock market in the world’s second-largest economy fared? A sharp drop on Friday February 9 left China’s Hang Seng index down 10% on the week, although there were steeper falls in the period June 2015 and February 2016 that began with a 30% slump over three weeks.
China’s officials have been keen to avoid a repetition of that turbluence. More than 300 companies responded by suspending their shares from trading and the market recovered some ground over the three sessions before the Chinese new year holiday began on Thursday this week.
More positive news is that today’s valuations on China’s stock market look more reasonable that they did at the time of the boom-and-bust in 2015, when many small investors got their fingers burned.
Institutions now play a bigger role as the asset management industry has moved in and China’s stock market moves far more in step with the world’s other major bourses. Analysts have noted that over the past two years the Shanghai and Shenzhen exchange’s CSI 300 index has performed almost identically to America’s S&P 500.
The other BRICS
How about the other three BRIC economies? India’s stock markets behaved very much in line with the US this month. The main Sensex and Nifty indices dropped sharply after the Wall Street sell-off on February 5, but only back to the levels they traded at in mid-December. When the US market rallied the following day, Indian stocks also recovered.
However, Indian investors have been warned that the world’s fastest-growing economy is facing the same challenges that triggered the US market’s retreat. Among these is higher inflation, particularly if the price of oil continues to rally as India imports 80% of its needs.
Food price rises are also in prospect as Narendra Modi’s government has pledged to increase minimum payments for farm products.
Brazil’s stock market is in more buoyant mood and this month’s sell-off was brief. The Bovespa index quickly returned to – and extended – last month’s bull run triggered by news of the conviction of the country’s former president, Luiz Inácio Lula da Silva. Investors aren’t keen on the prospect of the populist politician being returned to office in this year’s election.
However, after adjustments for the country’s recent high inflation the Bovespa is still some way from the peak reached nearly a decade ago in May 2008 before the global financial crisis abruptly halted Brazil’s economic boom.
This month’s fall has also largely bypassed Russia, in contrast to a year ago. In February 2017, Russia’s benchmark Micex index was the world’s worst performer, falling by more than 9% as hopes faded that the then newly-elected president Trump might remove economic sanctions on Moscow. Many analysts believe that Russian stocks still look cheap in comparison to other emerging markets.
The world’s best-performing stock market in 2017 came with a massive proviso. Venezuelan equities surged, with Caracas’s IBC stock index posting an unbeatable 3,883% gain, but this reflected a 97% currency devaluation on the black market and Venezuela’s soaring inflation rate.
However, a fixed official government exchange rate of 10 bolivars to the dollar gave the illusion of astronomical returns and distorted valuations so much that some Venezuelan companies had market capitalisations greater than those of giants such as Apple.
What markets might prove better bets for adventurous investors? Both South Korea and Taiwan were tipped by some analysts at the start of this year. South Korea’s KOSPI index fell sharply last week, but a rebound is expected – particularly if the country can improve relations with its Northern neighbour.
Taiwan’s market dropped nearly 5% on February 6 – its biggest one-day drop since 2001 and extended losses later in the week, but the country’s growing economy suggests that the setback is temporary.