Questions are being raised as to whether the almost decade-long bull market is at risk. There appears to be no well defined trigger for the recent sell-off, and analysts are looking at what forces are in play, that could be having such a negative impact.

Global Stock Markets are declining. The UK FTSE is in correction territory, and US stocks are suffering their worst fall in 8 months.

The technology index Nasdaq  dropped yesterday by 4.1%, its biggest one-day decline since June 2016, while the S&P 500 index fell 3.3%, its worst day since February. The S&P 500 index has now fallen five days in a row, which is its longest losing streak since President Trump was elected in November 2016.

Some of the worst hit US sectors include technology and consumer discretionary :

Source : Thomson Reuters Datastream

Some of the reasons  for the sell-off include :

Stock Market Rotation

There has been a meteoric rise of many major US stocks, particularly in the technology sector, in recent years. Meanwhile US growth has been mediocre. Now things are beginning to change and the improving US economy has led to fund managers finding new value in cheaper stocks that can take advantage of the growing economy.

Volatility

Many large automated trading systems are highly active buying when the markets are up and volatility is down. However, during the recent choppy conditions, many automated systems will be selling at an exacerbated rate. This algorithm based trading tends to magnify market declines.

Concerns over Global Growth

Whilst the U.S. economy is going from strength to strength, there has been concerns over economic growth elsewhere in the world. The President of the European Central Bank Mario Draghi has pointed to rising protectionism as the “major source of uncertainty” to the eurozone economy as the latest data coming from Europe shows lower business confidence and slowing exports. Furthermore, the International Monetary Fund (the IMF) this week cut its growth forecasts for many countries for this year and in 2019.

Government Bonds

Another catalyst was the recent spike in the yield on a closely watched government bond, to a seven-year high.

The 10-year Treasury note, whose key rate impacts the pricing on things ranging from fixed-rate mortgages to stocks to virtually every financial asset on the planet, recently climbed above 3.25% for the first time since May 2011. This adds to the threat of higher borrowing costs on things like houses and cars and corporate debt, which in conjunction with the economic obstacles caused by the U.S. trade war with China, creates a feeling of potential weakness and hence setting off a major sell-off.

In terms of the long-term investor, this is not a signal to start selling your investment funds. A long term outlook should always accept market cycles as part of the course on investing. Trying to time the market by buying and selling on every market movement is a recipe for high fees, and low performance.


About the author

Trading and Investment

Traded the markets for over 15 years, including Commodities, Bonds, Currencies, Equities, and Indices. I have also worked as a Chartered Financial Planner.
CeMAP, CeFA, DipFA, AdvDipFA, Ba(Hons) Economics, Chartered ALIBF

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