Fundamental Comment

Are the good days for equities over?


The selloff continued in stock markets, with the Dow Jones Industrial Average suffering its second biggest one day points fall, raising questions whether the good days for shares are over.

Dow Jones lost 1,032.89 points, or 4.15 percent, to end at 23,860.46, experiencing its worst week since the 2008 financial crisis.

Dow and the Standard & Poor's 500 index were down 10 percent from a previous peak recorded in January.

Now, the question is whether it is a natural correction after the tremendous gains generated over the past couple of years or is the honeymoon over.

While it could a healthy correction, there are some signs that there could be more sell off in equities.

Global shares have been taking advantage from the generous stimulus by major central banks, where now there seem to be more tendency towards monetary tightening.

The Federal Reserve could raise its interest rates next month while may hike the borrowing cost two more times this year.

The rise in inflation in major economies could prompt other central banks to end their bond purchases programs and reverse their loosening monetary stance.

The Bank of England hinted yesterday that interest rates could rise faster than predicted, given the very little spare capacity in the U.K. economy.

The BOE is highly anticipated to raise interest rates in May, while may hike it for a second time this year in November.

The recovery in global growth should be accompanied by a rise in inflation rates towards central banks’ target, which would speed up the monetary transition thereby adding more pressure on equities.

However, U.S. equities specifically could get some help from the cut in taxes, as it would beef up corporate earnings, where the improvement in global growth outlook should reignite interest in risky asset once again.

On the downside, a strong rebound in the U.S. dollar from a three-year low could dent the appeal of equities in Wall Street.

The dollar index has recouped losses since hitting a bottom of 88.37 on February 1, where it is currently trading around 90.12.

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