The recent sharp fluctuations in global stock markets have fluctuated by as much as 2,838 points in the past 7 trading days, which indicates that the market is undergoing a huge change. This not only has a direct impact on investors and market participants, but also has triggered profound changes in market structure and strategy.
In such a market environment, re-examining what has changed and what remains unchanged is crucial for formulating future investment strategies.
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Over the past few years, a notable feature of global financial markets has been low volatility. This is mainly attributed to the continued loose monetary policies of global central banks and support for asset prices. In this environment, market volatility has dropped significantly. For example, the market volatility index VIX has been at a low level continuously and has a narrow range of fluctuations.
However, the market has undergone dramatic changes in recent days, with the VIX index rebounding sharply to 50.30, second only to the market shock caused by the devaluation of the yuan in 2015. Unlike 2015, this market turmoil is unlikely to cool down quickly. The reason why the situation stabilized in 2015 is that China's economy remained stable after the devaluation of the renminbi, the chairman of the Federal Reserve also stepped in to calm the market, and market volatility was at normal levels.
Today, the market is facing different problems. Stock market valuations are on the high side, and the pressure to adjust driven by internal factors in the economy is increasing. For example, rising inflation in the United States may cause the Federal Reserve to accelerate interest rate increases. These factors mean that stock market volatility is likely to continue to increase, and investors will need to adapt to this new market environment.
In short, we are gradually moving into an era of high volatility, and investors need to adjust their strategies to adapt to market changes and fluctuations.
Will the stock market shock spread to other markets?
Volatility in the stock market may indeed have an impact on other markets, although markets such as foreign exchange, commodities, and bonds are currently relatively calm. Under the current circumstances, the foreign exchange market has shown a narrow range of fluctuations, with the U.S. dollar index oscillating between 88.50 and 90.00, and safe-haven currencies such as the Japanese yen also rebounding. Fluctuations in emerging market currencies have also been relatively limited, with the RMB maintaining an appreciation trend against the U.S. dollar, showing that the market has been relatively calm in responding to the shocks in U.S. stocks.
In the commodity market, although crude oil prices have corrected somewhat, the magnitude has been limited, and other commodities such as copper have also maintained fluctuations within a narrow range. Although gold failed to rise significantly and instead fell back, its overall performance was relatively stable. The bond market attracted capital inflows as U.S. stocks fell, causing the U.S. 10-year Treasury yield to fall back below 2.8%.
Overall, despite the apparent turmoil in the stock market, other markets remained relatively calm. However, if U.S. stocks continue to fluctuate sharply, other markets may be infected, triggering broader market turmoil. This situation can lead to a negative cycle: volatility in other markets reverberates into the stock market, adding to market uncertainty and investor panic.
The key, therefore, is to monitor the contagion effects of stock market movements on other markets. If other markets can remain relatively stable and there are no new unexpected factors to interfere, the stock market may be stable in the short term and look for opportunities to rebound or even reach new highs.
Market changes and adjustments
1. Changes in investor behavior and sentiment
After the big shock, investors' risk appetite was significantly affected. Some investors may choose a more conservative investment strategy, seeking stable asset classes such as gold or government bonds. In this case, demand for safe assets may rise, while liquidity for riskier assets may be challenged.
2. Policy and regulatory responses
Market shocks often trigger attention and action from regulators and policymakers. They may take measures to stabilize market sentiment and maintain market order, such as suspending trading, adjusting interest rates, or issuing market stabilization measures. The implementation of these measures may have an important impact on both short-term and long-term market trends.
3. Re-evaluation of industries and asset allocation
Shocking events often cause investors to reassess the performance and prospects of different industries and asset classes. Certain industries may be favored for their resilience and adaptability, such as technology and healthcare, while traditional industries such as energy and aviation may face challenges in adapting and repositioning.
4. Changes in technology and trading strategies
Large-scale market shocks will also prompt investors and trading platforms to re-examine their technology and trading strategies. More sophisticated algorithmic trading and risk management tools are likely to become more widely available in order to respond more effectively to market uncertainty and volatility.
5. Adjustments to the global economic outlook
Finally, major shocks in the global stock market will inevitably affect the outlook and expectations of the global economy. Market participants and policymakers alike need to reassess factors such as economic growth, international trade and consumer confidence to more accurately predict future economic trends.
In general, the global stock market shock is not only a major test for the market, but also an opportunity for market change. Amid such changes, investors and market participants need to remain alert and flexibly adjust their strategies and decisions to adapt to new market environments and challenges.