The sharp fall in early 2016 markets may have saved a larger fall later
What if markets hadn't tumbled in January and February?
The Great Roiling of Early 2016 influenced or caused:
- The Fed to move to the sidelines
- Surprise BOJ easing
- A surprisingly large ECB QE package
- China cut the RRR and delivered more stimulus
- Surprise RBNZ cut
- Canada shifted to a larger deficit
Consider this quote from George Soros:
"Financial markets constantly anticipate events, both on the positive and on the negative side, which fail to materialize exactly because they have been anticipated"
So what if markets hadn't sent a loud and clear message to central banks? The Fed probably would have hiked by now and the PBOC and BOJ would be waiting. Assuming that alone didn't cause a separate spat in the markets, one would surely be in the pipeline.
What's the lesson?
There isn't much of a takeaway in the current environment but it's a powerful lesson.
Markets will be roiled again and when they do, focus on policymakers. The type of correction we had earlier this year was a standard 10% dip but one of the big reasons it didn't turn into 20% or more was because policymakers had ammunition and were willing to use it.
The next time trouble starts, look for signals about governments and central bankers doing more. Unless something hits that's completely beyond their control, they have a tremendous ability to stabilize sentiment.
