After registering sharp declines during the sessions of last Friday and Monday, the main stock indices in the world made significant rebounds on Tuesday, which allowed them to erase part of the losses suffered previously and to give the impression that everything is back on track. An impression that should not be trusted too much.
On Wednesday, the European and Asian stock markets continued their recovery, recording significant increases in value which allowed them to partially plug the gaps that had been opened earlier.
The North American stock markets also seemed to clearly want to embark on this path throughout Wednesday morning before changing course in the afternoon and ending the day in the red, which does not bode well for Thursday…
This type of alternation movement is a scenario that has been seen many times before. When stock markets reach the end of a cycle or suddenly face a moment of doubt about the context and solidity of the economic environment in which they operate, their behavior suddenly becomes more erratic.
After more than two years of fairly linear progression, without too many upward or downward surges, the markets have suddenly entered a world where volatility will be the dominant variable that will have an impact on their behavior and put investors on alert.
Volatility feeds on uncertainty and markets need certainty to thrive.
We saw this type of extreme volatility in particular when the technology stock bubble burst in April 2000, when we tolerated stocks trading at 200 times their earnings value, even though we knew that this type of valuation was not sustainable.
After peaking in mid-March of this year 2000, the NASDAQ index of technology stocks began to decline very slightly and innocuously until one Thursday in early April the index recorded a heavy decline of 7% in a single session, losses that would however be fully recovered during the Friday session.
This wild volatility was short-lived. The following Monday, the NASDAQ began its two-week long descent into hell during which it lost 27% of its value. By the end of 2000, the decline had reached 39% and it took the NASDAQ three years to begin to reverse its upward trend.
The Apocalypse Scenario
The volatility that has just set in on the markets does not mean that it will cause violent stock market crashes in the coming months, but many analysts believe that it would be in the order of things for a correction of around 10% to occur soon in order to allow the various indices to regain some momentum.
Last week, stock markets used the first excuse they could get their hands on – the larger-than-expected rise in the US unemployment rate – to overreact, interpreting the statistic as a harbinger of an impending US recession.
This vision of the immediate future is entirely consistent with that formulated by the economist and stock market strategist François Trahan, who has been anticipating for two years now an extremely severe recession in the United States and a devaluation of around 35% of the S&P 500 index in the United States.
All this because the US Federal Reserve raised interest rates in the United States too quickly and too significantly, and historically such increases have almost always caused recessions two years after they were implemented.
François Trahan believes that it is the rise in the unemployment rate that will cause the collapse of the American economy, which is essentially based on consumer spending, and if there are fewer active workers, there are just as many consumers who will become inactive.
For such a prophecy to come true, however, there would have to be a significantly greater deterioration in economic activity than the still positive situation currently prevailing in the United States.
What we can see, however, in light of their behavior in recent days, is that the stock markets seem much less optimistic than economists, who are still far more numerous in anticipating a soft landing for the American economy than in foreseeing a recession.
Will the role of leading economic indicator that is still attributed to the stock markets prove them right? If so, we can only hope that the current volatility is only temporary and that it does not become the trigger for an economic and financial apocalypse that no one needs or wants.