The February 2018 drop was not a real stock market crash

Since the global financial crisis nearly a decade ago, stock markets all over the world have been steadily recovering. The Dow Jones, which is widely regarded as a bellwether index, has enjoyed double-digit growth in five of the past ten years. In 2017 it soared by 25 percent.

Albeit the stock market’s run in 2017 was a very exciting one, in early February of 2018 the Dow Jones suffered its worst fall in six years, losing 4.6 percent in a single day. This triggered a sell-off by investors across the globe. At one point, losses saw the index fall by 1,175 points, the largest drop in the Dow’s history.

On February 5th, 2018, the VIX index – a measurement of market volatility – registered its biggest daily spike on record. Moreover, there were periods during the sell-off when stocks, government bonds, and gold dropped simultaneously. This signifies indiscriminate, across-the-board liquidation by frightened investors.

The good news for investors is that this was not a real stock market crash. Worldwide markets are still much higher than they were at the end of 2017. This turbulence was a market–driven change in valuations, that is common after a strong Bull run. In fact, it may well be that the global economy has finally moved on from the 2008 Lehman crisis, and finally escaped the doldrums of its long aftermath.

The American economy matters a great deal to the world economy. International markets take their lead from the United States. Global stock prices have long relied on a core assumption that U.S. inflation will remain low. That assumption allows the Federal Reserve to keep interest rates down. Moving forward, the challenge for central bankers is to “tiptoe back to normality,” and gently raise interest rates without spooking the markets or the investment community.

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