Global stock market turmoil seems to have faded as quickly as it began. Intense fears of a major recession and market crash have subsided, largely due to timely interventions and guidance from central banks. Earlier this week, the Federal Reserve suggested it was ready to cut interest rates to support the economy, although it did not foresee a recession. This morning, the Bank of Japan’s deputy governor downplayed the likelihood of an imminent rate hike. Both statements address investors’ primary concerns: that the Fed might err by maintaining tight policies for too long, and that the BoJ’s actions could undermine the yen-funded carry trade. This should help ease some of the market panic and raise questions about whether the initial reaction was an overreaction. The key question now is whether this was a brief crash or if there are deeper issues investors need to consider. It could be a combination of both.
It is worth noting that US stock markets were significantly overbought and remain in an overvalued state. Given the global downturn, it will be challenging for companies to continue delivering strong earnings, making a market correction not only justified but also healthy. Considering that part of the equity bull run was fuelled by the Fed’s aggressive money printing, the Fed’s higher interest rates and the withdrawal of $2.0 trillion from the USD liquidity pool will likely have a countering effect. One might argue that the recent stock plunge has brought prices to a more realistic level, although they still remain quite high. However, while a market correction is justified, it’s also likely that a major recession will be avoided. Despite the global economy being more indebted than ever and more sensitive to economic shocks, central banks are now more willing to use quantitative easing (QE) and will do so if conditions worsen significantly.