Get Used To Such Market Crashes, Says Ruchir Sharma
If the U.S. market crash exacerbates to a 25% fall, it may push them close to a recession, writes Ruchir Sharma.
The sharp sell-off seen on Wall Street during the last week, the biggest since 2011, is just a return to normalcy for markets. That’s the view from Morgan Stanley Investment Management’s chief global strategist Ruchir Sharma who said that the fall has been magnified by the calm that preceded it.
“Going back three decades, the average market drop in any given year has typically been around 10 percent,” Sharma wrote in an op-ed piece in the New York Times. “What Americans are witnessing now is thus a return to normal market behavior, which has never followed a straight line,” he added.
Sharma noted that before the 8 percent decline in U.S. equities over the past week, the S&P 500 had gone two years without suffering a drop of that extent.
Spoiled by this unnaturally placid stretch, many Americans had forgotten what a routine market setback even looks like. They better get used to this.Ruchir Sharma In NYT Column
2018 is “pivotal” because the conditions that triggered the uptick in stock prices are now likely to deteriorate, he cautioned. Over the last one year, asset prices have been buoyed by accelerating global growth, low inflation and loose central bank policies - all three which “are now poised to turn against the bubbly market”.
Over the coming year, these forces are likely to reverse, as labour shortages slow growth and begin to drive up inflation, and bring a normal level of volatility back to the markets.Ruchir Sharma In NYT Column
The scale and timing of this market reversal will be decided by the third factor - easy money, Sharma wrote. Central banks printed more money and held interest rates at record low. Investors used the "cheap liquidity" to drive up asset prices, Sharma wrote. He noted that the U.S. stock market is 25 percent higher than it would've been, had it grown at a pace which matched the historical average.
Stock values have rarely risen so high, yet many seasoned investors had come to believe these nosebleed valuations could be justified as long as the Federal Reserve Board kept interest rates low.Ruchir Sharma In NYT Column
Sharma said that this led to complacency in the market, which in his words “was arguably at a record high when the correction began last week”.
Earlier when stock markets were this inflated, higher interest rates brought them back down to Earth. But in the recent years, risks have risen and the size of the stock market has a "magnified potential economic impact", according to Sharma.
If the stock market suddenly reverts to its long-term trend, implying a fall of almost 25 percent, it could push the American economy close to recession.Ruchir Sharma In NYT Column
Sharma wrote that the U.S. Federal Reserve may now be forced to raise rates faster than expectations which could pull down asset prices further. "2018 may be remembered as the year when the moody market beast returned to its natural state," he added.
