Three Truths About Stock Market Sell-Off Gold Investors Should Know

Until recently, the financial press was reporting confidence in the global economy in 2018. Participants at the World Economic Forum in Davos were full of optimism and they outdid each other in upgrading their forecasts. One week later, the global stock market plunged, making analysts stupefied. “As equities tumbled, gold should shine”, almost everyone thought. But that’s not what we saw. What really happened, then?

Crash or Correction? – That Is the Question

Global equities were a sea of red over the last few days. The U.S. stocks marked their worst falls in more than six years. From Thursday to Monday, the Dow Jones Industrial Average Index tumbled more than 1,800 points, or about 7 percent. The S&P 500 followed suit, as one can see in the chart below. The Wall Street triggered a domino then, pulling Asia and, eventually, Europe down.

Chart 1: Dow Jones (red line, left axis) and S&P 500 Index (green line, right axis) from March 2017 to February 2018.

Are we experiencing the next big market crash? Is it the replay of 2008? We don’t think so. For two major reasons. First, the recent declines were not unprecedented. Corrections happen from time to time. Indeed, the Dow Jones sank 4 percent or more almost 40 times over the last thirty years.

Second, fundamentals remain solid. Surely, private and public debt levels are massive and geopolitical tensions are still present. But corporate profits are excellent. The perspectives in Europe are finally promising. Economic growth in the U.S. has been accelerating (the Atlanta Fed GDP model forecasts 5.4 percent growth in the first quarter of 2018). Simply put, no important economic news emerged which could justify a stock market crash. So why did stocks tumble?

But Seriously, What Happened?

You’re probably wandering what’s going on. Oh, that’s simple, isn’t it? Everyone talks about it. Friday’s surprisingly strong payrolls triggered the declines, it’s obvious. There was a pick-up in wage growth, so investors started to worry about inflation. They feared that the Fed would tighten its stance in response to rising price pressures. Bonds yields soared and volatility surged, as the next chart clearly shows.