Key U.S. and European stock indices are down for the third week in a row, oil is stuck at well above $100 a barrel, and the VIX volatility index – known as the “fear index” – is showing a sharp rise, reflecting worsening investor expectations, marketwatch.com states.
The Dow Jones blue-chip index, the Nasdaq technology index and the benchmark S&P 500 index ended trading Wednesday down 1.6 percent, 1.5 percent and 1.4 percent, respectively. The Dow Jones index lost about 770 points.
Major stock indices fell noticeably after U.S. Federal Reserve Chairman Jerome Powell warned that a sharp rise in oil prices “could pose a challenge to inflation expectations,” investopedia.com noted in a March 18 article.
“Panic or rational reaction?
Current market dynamics are close to panic sentiment, but do not yet fit classic crisis scenarios. Even with the VIX volatility index up 9.4% for the session, which is a sharp jump and signals “extremely nervousness” among investors.
However, the scale of the fall has not yet been avalanche-like and is fairly limited, suggesting investor caution and a review of risk levels rather than panic, analysts at investopedia.com said. “These are not movements that indicate a long-term collapse,” the publication quoted David Miller, CIO of Catalyst Funds, as saying,
Rather, he said, the market is reevaluating the duration of the conflict from a “quick operation” to a weeks-long scenario.
Experts emphasize that the main reasons for the fall of quotations in the markets remain oil and geopolitics. But in the context, investors also take into account the increased inflation risks and possible adjustments in the monetary policy of the U.S. and the EU.
In the list of concerns for negative scenarios in the markets, investors also name other influencing factors:
– Rising costs of logistics and production of goods;
– market redistribution and possible shortages of many key raw materials;
– the resulting fall in corporate profits and changes in companies’ investment strategies;
– intensification of “trade wars” and restrictions in international trade.
Additional pressure, as noted by marketwatch.com, is created by uncertainty around the possible further escalation of the conflict and the threat of supply disruptions through key routes.
As analysts note, the current reaction of the markets is not only a reassessment of risks, but also a “transition to a protective model of behavior”: investors go into cash, bonds and commodity assets.
What should an investor do now?
Given all these circumstances, many analysts and experts are now giving various recommendations and advice to investors. And although many of them are quite general and standard, let us try to summarize the main practical strategies that stock exchange analysts highlight:
- In an environment of growing volatility, the key objective is not to maximize returns, but to manage risk and preserve capital;
- Increasing the share of protective assets. As such, government bonds, gold and commodity instruments should be considered.
- Reducing exposure to overheated sectors. Rate-sensitive technology stocks remain under pressure due to inflation expectations.
- Focus on energy and commodities companies. Rising oil prices are supporting the earnings of these segments, making them relative beneficiaries of the crisis.
- Increased liquidity exposure. Cash gives flexibility to enter the market at deeper drawdowns.
- Avoiding abrupt decisions. Historically, panic sell-offs are often followed by rebounds – impulsive actions can lock in losses.
Experts emphasize that it is more correct to describe the current situation on the markets as an early phase of stress correction rather than a full-fledged panic. This conclusion is supported by the moderate fall of major indices and the absence of mass sales at the level of 5-10% per day.
The main risk, analysts believe, is not the current market drawdown itself, but the change of regime from the expectation of soft correlation to the scenario of prolonged instability with high inflation and geopolitical shocks.
