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Market correction long time coming

Helal Miah, investment research analyst at The Share Centre, comments on whether this week’s market volatility should be cause for concern for investors:

“This level of market volatility could be a cause for concern for some investors, who in recent years have got used to little instability and a general uptrend. Indeed, there seemed to be little to worry about when putting money into the stock market as the belief was that should things turn sour, then central banks would come to the rescue. However, after nearly a decade of support and stimulus, the US central bank policy makers have begun the unwind process, the UK policy makers are following while a stronger Eurozone is indicating that the ECB will follow suit at some point.

“While markets have priced in the expectations of a series of rate hikes in the US for this year, 3 to be precise, a set of events last week led investors to reassess the current lofty level of the market. The tech giants have somewhat driven the market higher and expectations on their corporate profitability were high, but the actual results fell short of expectations. Then on Friday we had the latest US jobs figures which were very good. 200,000 new jobs were created in January, the unemployment rate stuck at a lowly 4.1% and wage growth, which had been low for a while had ticked up to 2.9%. From an economic point of view these were very much welcomed, showing a relatively healthy US economy. Nevertheless, the 2.9% growth in pay came into focus and pointed towards any slack in the economy fading and raised the prospect of inflation returning. There certainly isn’t a fear of inflation running away, but there is the expectation that policy makers will take a more pre-emptive stance, and therefore that interest rate path is likely to be steeper than anticipated.

“The reaction on the US stocks markets was pretty violent, but when taking into the context the sharp rally, and some investors locking in profits, it is fairly understandable. In the coming days and weeks though, the debate will mount over the role that algorithmic traders played on the downside momentum, taking the Dow at one point down by over 1500 points and comparisons to the flash crash in 2010.

“Yesterday, Asian markets followed the US and went into panic mode, but during the European trading hours, markets paused for breath and reflected upon the events and gave some sense of calm. So far, this is just a correction, nothing more, and a correction has been called for by many analysts for a while as valuations, especially in America, had gotten ahead of themselves.

“Volatility remains at heightened levels, at least by recent standards, but the big question is whether volatility should be a cause for panic? We believe not, simply because the global economy has not turned for the worse, in fact on the economic front its actually good news. We do not believe this is the start of a bear market which usually precedes an economic downturn, the global economy is far from the top of the cycle and corporate profitability is on an upward trend.

“Despite this, in recent months, we have been expressing caution to investors in chasing the rally and have advised them to hold some cash on the side-lines instead for better buying opportunities. We believe, now could be that buying opportunity.”