Will Stocks Bounce Like Last Time? | The Big Conversation | Refinitiv

TL;DR

Monday's sell-off resembled previous market lows, but the current policy backdrop with potential Fed rate hikes and inflation prioritization makes a major low unlikely.

Transcript

Monday's sell-off had a lot in common with the volatility experienced on Monday the 24th of December 2018 and Monday the 23rd of March 2020, in that it occurred on the first trading day after an expiry. Both those previous dates were major market lows. So should we expect the same thing to occur on this occasion? That's The Big Conversation. First ... Read More

Key Insights

• 😘 Monday's sell-off resembled previous major market lows, but the policy backdrop and absence of a mature bear market suggest a different outcome.
• ❓ Option expiries can contribute to market volatility, and January's expiry had a significant impact.
• 🥺 The Fed's focus on inflation may lead to continued rate hikes, despite potential negative effects on equity prices.
• 🪜 Retail investors have become a prominent force in the market, but their emotional behavior adds uncertainty to market dynamics.
• ❓ Institutional investors have shifted towards defensive sectors and stocks with steady growth and attractive dividends.
• 😘 The Nasdaq needs to rally significantly to dispel concerns of retesting the lows.
• 💱 The recent market activity indicates a changed market nature, with the Fed potentially less swayed by poor price action.

Questions & Answers

Q: How does Monday's sell-off compare to previous market lows?

Monday's sell-off shares characteristics with previous lows in December 2018 and March 2020, but the policy backdrop and absence of a mature bear market make a major low less likely this time.

Q: What impact do option expiries have on market volatility?

Option expiries can act as an accelerant for market volatility if the market is already volatile. The inventory overhang of positions can lead to increased pressure and potential price swings.

Q: How does the current policy backdrop differ from previous years?

The policy backdrop now focuses on inflation, with expectations of Fed rate hikes. The Fed's priority is to address inflation, potentially at the expense of equity prices.

Q: What role do retail investors play in the market?

Retail investors have become significant participants in equity markets, especially during the pandemic. However, their emotional reactions and tendency to sell rallies make market outcomes less predictable.

Summary & Key Takeaways

• Monday's sell-off had similarities to the market lows in December 2018 and March 2020, occurring on the first trading day after an expiry.

• The Nasdaq's recovery from a 4% intraday loss has historically been followed by further losses.

• The January option expiry had a large notional value, potentially impacting market volatility.

• The policy backdrop, including expected Fed rate hikes and inflation concerns, differs significantly from previous years.