Just weeks after the stock market hit an all time high in a bullish spree, nearly $5 trillion was wiped out from markets worldwide in what is apparently the worst week for U.S. equities in two years.
While the comeback from this sudden downturn was strong and sharp, with the Dow climbing 410 points on Monday and the S&P scoring its biggest 2-day percentage gain since June 2016, market volatility has traders and investors worried about the future.
"We don't think we are out of the woods yet," said Ryan Detrick, senior market strategist at LPL Financial. "This is an oversold bounce after last week's drubbing."
The volatility is beginning to cast doubts on the equities markets and corporate bonds themselves. Profits were easier to come by when the 10-year yield traded in its smallest range in a half-century, inflation stayed low, and stability held across financial markets. Gains are harder when low rates start to disappear and are replaced by such instability, regardless of whether this instability also yields extremely high profits at times.
"What's happening now is just price discovery between bonds and equities -- how far can the bond market push yields up before the equity market cracks? The big fear in risk markets is that we get a big CPI print and it validates the narrative that inflation is coming back and the Fed is going to have to move faster," said Stephen Bartolini, portfolio manager at T. Rowe Price.
Speculation regarding the driving forces behind the current market madness has narrowed it down to four main factors.
First, we have inflation. Inflation has taken the form of rising wages, which has caused prices to increase overall to accommodate higher labor costs. This has led to the second factor - interest rates - rising as the Fed utilizes them to counter inflation. Higher interest rates would make companies' stocks less valuable, as they would become less profitable. Consequently, bond yields rise because bond prices fall due to their low degree of attractiveness after higher prices.
The fourth and final factor is an overheated stock market, which is a separate but important issue nonetheless, as investors believed stocks were becoming pricey after a long-running bull market.
Keeping these conditions in mind, the market may have just collapsed because overheated stocks needed to be quelled at some point. Many believe the worst is over.
"The probability of a recession remains well below average, given strong global GDP growth and loose financial conditions," Goldman chief U.S. equity strategist David Kostin wrote in a recent report.
Corporate profits continue to rise, and they'll likely grow even bigger after companies start to realize the benefits of the new corporate tax overhaul that comes into effect later this year. The economy is expected to grow strong this quarter, and inflation is still quite low.
What's happening now could be considered a correction of sorts - that is, when stocks fall 10% from a recent high. While this hasn't explicitly happened, the market has come close, meaning that stock prices are actually becoming more affordable and investors should adopt a buy-and-hold strategy to make money in the long term.