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A little spark set off a fire in stocks - now everyone's wondering what's next

Feb 10, 2018, 19:50 IST

David Gray/Reuters

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  • The Dow Jones industrial average ended a wild week up 314 points on Friday, but down over 1,300 points since the close the previous Friday.
  • Goldman Sachs said the volatility explosion that rocked markets Monday won't happen again anytime soon. But other market participants say "market technicals are very negative."


One little spark lit a fire that rocked the stock market last week. Now, investors are wondering whether the kindling is exhausted.

The Dow Jones industrial average ended a wild week up 314 points on Friday, but down over 1,300 points since the close the previous Friday.That represents a 5.2% decline for the week, the worst one-week percent decline since January 2016.

There's some debate over what exactly set the selloff in motion. Many on Wall Street point to astronger-than-expected spike in average hourly earnings, leading to fears of surging inflation and higher rates. Others have pointed to the unwinding of a popular short-volatility trade and computer-induced selling as bigger drivers of the selloff.

Either way, the week that just passed shows that "any tiny spark can light the flame," according to Lance Humphrey, a global multiasset portfolio manager at USAA.Then, when selling pressure begins, "all of a sudden you see a very quick rush for the exits," he said. The selloff "almost feeds on itself."

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Chris Wolfe, chief investment officer at First Republic Bank, echoed that sentiment, saying "you need a spark to get the kindling on fire." He highlighted the role of exchange-traded funds in the selloff.

Now, the question is whether the volatility extends in to another week.Goldman Sachs has saidthe volatility explosion that rocked markets Monday won't happen again anytime soon.

But Timothy Ng, chief investment officer at Clearbrook Global Advisors, a consultancy, said that "market technicals are very negative," saying the selling could go on for another week. That could then present an opportunity for investors, he said.

"Once the market stabilizes investors need to go back to fundamentals as equities have become much cheaper and can provide opportunities to pick up solid companies at attractive valuations. This was hard to find just over a week plus ago."

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