How bad? Well…on Friday, February 2 the S&P 500 closed at 2,762 points and on Friday, February 9 it ended up at 2,620, representing a drop of 5.1%. All of this was accompanied with wild swings in between. In Hong Kong, it was the same story but worse. The Hang Seng Index went from 32,602 on February 2 to 29,507 on February 9, indicating a drop of 9.5%.

As you might have noticed, I rarely write about recent market conditions as I normally don’t have anything relevant to say about it. However, after last week’s damage, I got a few questions and thought it would be interesting to revisit a few concepts and provide you with some feedback.

vainodesositis / Pixabay

The first question is why did this happen? As for many systems in existence, it was due to a combination of factors rather than one specific reason. Some of the factors you want to consider are 1) the length of the latest bull cycle making a lot of investors/traders nervous, linked to 2) where we are in the economic cycle, and 3) pure panic. I never listen to what economists have to say, but when I do listen to someone talk about more macro type of factors, that person often is Ray Dalio. In this instance, once again he provided the best (and shortest) explanation I have found.

“Over the past week or so, we had reports of strong growth and rising wages (good things!), which sent bonds and stocks down (bad for most investors) due to justifiable fears that the Fed will tighten faster than is priced in the credit markets. The surge in growth and wages came because of both the fiscal stimulation and the rekindling of animal spirits, thrusting the economy into late-cycle capacity constraints, which is leading to the expectations of faster Fed tightening.”

–          Ray Dalio – February 5, 2018

You can find the full article here.

The next question is, why last week and why that severe (or why not even worse)? To this question, I have no answer and I haven’t spent one minute trying to forecast the market. In the short term, markets are irrational and so, personally, I find it quite difficult to have a rational opinion about an irrational concept.