On 2 February 2018, Janet Yellen stepped down as the Federal Reserve (Fed) Chairwoman having completed her term. In a show of “protest”, Wall Street sold off as the US bellwether Dow Jones Industrial Average index (DJIA) fell 665.75 points, capping off its largest decline since June 2016.
Indeed, in the last four decades, Yellen was the shortest-serving Fed Chair. Her predecessors were all reappointed for second terms, even when the US Congress had a change in majority. Was it because Yellen underperformed?
On the contrary, Yellen has mostly succeeded in her role when she took the reins of the central bank. During her term over the last four years, Yellen lifted the US economy out of doldrums from the 2008 financial crisis and, at the same time, inheriting the task of ending the unprecedented quantitative easing (QE) programme.
Back in 2013, the US stock market lost nerves on fears when then-Fed Chair Ben Bernanke hinted that the Fed was looking to end the QE programme. But unlike Bernanke, Yellen’s systematic tapering process helped to keep financial markets stable and despite having raised interest rates five times, US stocks still rose to record territory.
In Yellen’s last week as the Fed’s Chairwoman, DJIA surged to a historical high of 26,616.71 points before plunging lower on her last day on 2 February 2018. On 5 February 2018, the US stock market plunged even further when Jerome Powell was sworn in as the new Fed Chair. By 8 February 2018, the Dow has shed 10.35 percent to close at 23,860.46!
There were some others who suggested that strong US employment data sparked off fears of faster interest rate hikes, which ultimately led to the stock market’s tumble. But recall that in 2017, the US economy was already picking up and the Fed’s interest rate outlook was hawkish. In spite of that, US stock market soared and many were also giving calls to buy bank stocks as wider interest rate margins will lift banks’ profitability.
Why did analysts turn bearish this time round when nothing much has changed? This shows that analysts often cherry-pick in their interpretation of the market. In my opinion, the recent market correction was a technical one, especially since stocks had ran up too much too rapidly. At the start of the year, DJIA was around 25,000 points and Trump said that the US stock market would add another 20 percent gain in 2018. Investors were euphoric and they emphatically drove the DJIA to 26,616.71. With this much a gain, a major market correction was imminent, just that no one would know when it would rear its ugly head.
The market is now on a downtrend. Investors should consider reducing their positions to relief some stress. Wait for the market to consolidate before buying back when the market rebounds. How to know if the stock market has reversed? A simple and effective way is to make use of the 2-day and 19-day moving average (MA) crossover method.
That said, investors are advised to be disciplined when using technical indicators. Whenever signals are triggered, do not hesitate to execute. Do not let your emotions take over and diligently follow the signals. As compared to emotionally-driven trades, a technically-driven one is much more efficient. This will help you guard against the situation when the stock market has yet to bottom out. And the opposite is true, like in the previous rally when the stock market went on to climb even when everyone thought it had peaked.
Of course, investors who had bought stocks long ago at much lower prices need not worry about the current market correction. How about those who want to take advantage of the market correction to buy in at lower prices? What if prices fell after buying? The answer is to sell. And if rises again after selling? Then simply buy them back. What if they fell after buying back in? Then sell again. This is because no one will know how much more the market will correct. So learn to withstand the pressure and keep your losses minimal.
Market volatility has returned and no one knows how the stock market will perform for the day before it closes. Many have turned to speculate and bet on the market’s day movement. Betting on a rebound and “bottom-fishing” in the current circumstance has become difficult for retail investors.
Trump has already spoken to quell the rapid sell-off of US stocks, lamenting that the stock market plunge was “a big mistake”. However, the stock market is not likely to pay too much attention to Trump’s rhetoric. But Fed official Charles Evans also stepped in by saying that there would be “no rate hikes needed before mid-2018”. Would the US succeed in re-instilling confidence in its stock market? We can only observe further.
While strong US employment data sparked off fears that the Fed will quicken interest rate hikes, the fundamental reason why the stock market is seeing a major correction now is because of the huge gains made in 2017. At the moment, DJIA has tumbled to a two-month low and we do not know if the correction will continue. This because investors who have bought stocks two to three months ago are still profitable and they can still sell and take profit.
Currently, the US is still the world’s largest economic powerhouse and when the US sneezes the rest of the world catches a cold. Globally, stock markets have not been spared as the rout spread from US to other major markets like Japan, Europe, Singapore and Hong Kong. The world will be scrutinising Jerome Powell when he chairs his first Federal Open Market Committee meeting in March 2018. If the Fed board votes to raise interest rates, another round of sell-off could be sparked off.
Given its impressive gains last year, the probability of further correction is rather high. Investors should not be too optimistic about Trump’s plan to “save the market”. For China investors, China-A shares’ performance has been even poorer as the Shanghai Securities Composite Index has already fallen below the level last seen at December 2016.
Lately, the Chinese Renminbi also corrected after appreciating against other currencies for most of last year. The forex market is highly leveraged and a one-percent correction would have decimated numerous speculators. If they cannot meet their margin calls, selling momentum of the Chinese currency could become stronger.
The weakening of the Chinese Renminbi also impacted the Chinese stock market: Initially, many institutions converted their monies into Renminbi to invest in China-A shares, to take advantage of the strengthening of the Renminbi. With the dynamics reversing, many of these institutions would either have exited, or are looking to exit, the Chinese stock market for the time being.