Global equities have stumbled after surging over the past year. A shakeout is not surprising after the huge run-up in the face of soggy earnings, but the critical question is whether this will prove temporary or the start of something more durable and ominous.
As a starting point, policymakers are trying to keep conditions extremely accommodative which is supportive for equities. However, the offset is that stocks have moved decisively ahead of the improvement in global trade, earnings and manufacturing confidence. The rally since the beginning of 2019 has occurred almost entirely due to a multiple expansion. This leaves an air pocket and less of a valuation cushion to absorb bad news, like seen this week with fears over the Coronavirus impact. At minimum, it means that stocks will prove much more volatile and prone to corrections than was the case during the second half of 2019.