The panic selling in global equities resumed after a brief reprieve last week – the S&P 500 index shed another 3.75 per cent overnight (February 8), bringing its total losses to 8.5 per cent since the correction started. While investors’ concern on rising rates was a commonly-cited reason for the correction, the unwinding of exchange-traded products (ETPs) that bet on volatility is another plausible factor accentuating the situation. Volatility could well stay at elevated levels in coming weeks, dragging markets lower.
But the positive macro backdrop of global synchronised recovery and positive earnings momentum do not change overnight. It is also premature to suggest that the current stock market weakness has impacted the economy in a negative way. It is believed that rationality will eventually triumph panic – for two reasons:
First, the positive outcome from this correction is that valuations are no longer expensive for the US market. And indeed, the S&P 500 index trades at 16.6x forward price-to-earnings (P/E) after the sell-down and this is below the long-term average.
So, beyond the near-term gyrations in asset prices, the current bout of weakness actually provides an attractive entry point for longer-term investors.
Second, the anatomy of the current correction also suggests to us that investors are already positioning for an eventual rebound. In past correction cycles, overvalued growth stocks tend to undergo the most severe sell-down. But interestingly, it is not the case this time. The NYSE Fang+ Index, which consists of technology-related growth stocks, has continued to outperform the broader market during this correction phase. This shows that portfolio allocators are holding on to their growth stocks to position for an economic upturn.
Bouts of correction
Since 2010, the S&P 500 index has undergone bouts of correction along the way and typically, they are not long lasting. It is no different this time.
The losses seen in this correction cycle is steeper (at 8.5 per cent over six days). At its current level, the S&P 500 index could well see a trough should it correct another 5 per cent, which will bring its valuation to 14.1x forward P/E.
In the context of global equities, the sell-down in 2010 stretched over 111 days and the total losses amounted to 24 per cent. And more recently, during the 2015-2016 correction, the sell-down was stretched over 188 days and the total loss was 20 per cent. In the latest bout of market correction, global equities have lost 7.5 per cent thus far.