How much further can the market fall?

21 January 2016 2:09 pm

And so the stock market has gone from disastrous to just bad. After the Dow plunged as much as 565 points on Wednesday after crude oil crashed below $27 a barrel, the bargain hunters moved in and stocks staged a comeback and the Dow closed with a loss of “only” 247 points. The S&P 500, down as much as 3.7% earlier, closed the day off 1.2%. It was still the lowest close for the index since April 2014. The Nasdaq briefly turned positive before ending with a loss of 0.1%.

What’s clear is that we have get used to more volatility. As Evan Horowitz at the Boston Globe points out, big swings in the stock market are now par for the course. In the 1970s, there were fewer than 60 occasions when the S&P index moved more than 2 percent, he says. In the 1980s, there were 109. Over the last decade, there have been 208 such occasions, or about 20 each year. So if the markets have seemed especially volatile these past few days, that’s partly because every month is more volatile than it used to be.

So how much further can markets fall? Investment managers are warning that markets probably have further to go as China’s growth slows, oil prices plunge and central bankers lack tools to prop up economies.

As speculation mounts that Beijing is slowly losing its grip on the levers it uses to control China’s massive economy, investors have taken to studying each market swing in Shanghai, an index that used to receive scant attention. Everyone is now hoping to spot some heretofore missed clue about an impending global calamity. The big fear is that a China crash would eventually spill over into the US touching off another global recession.

Is it any wonder that strategists at Morgan Stanley and Merrill Lynch Bank of America are now pricing in a 50 per cent chance of recession?