The latest down-turn in the stock markets turned out to be particularly jarring for investors of all levels of sophistication. In terms of magnitude, the April ‘flash crash’ came along as a 7-sigma event, meaning that statistical probability of such a drop using technical analysis would be somewhere less than 0.001%. While technicians will accept that such a measure of probability is flawed, it does demonstrate how the massive sell-off is indicative of yet another ‘black swan event’, and could be an indication of trends to come.
That being said, between the 10% decline in the price of gold, the overall S&P 500 decline, falling oil prices, and the jumbled currency adjustments, we first need to understand exactly what it is that caused the decline, before we can look at whether or not it is indicative of a pervasive trend.
The April sell-off in the equity markets started off with a major decline in gold prices, resulting from increased sales in Europe. This sudden influx came as a result of the continuing crisis in Cyprus, and demonstrates how it is that the union needs to start liquidating reserve assets to shore up its risky bank accounts. Combine this sell-off with a number of major investment banks making down-grade recommendations on the commodity, and we can suddenly see how it is that a 10% drop enters the picture. From there, the S&P 500 took a massive hit as Apple’s earnings report proved to be much less appealing that expected as a result of declining profit margins due to price cuts.
Since Apple’s stock takes up such a large portion of the S&P 500 due to its sheer size, any incremental movements in that company’s stock price will have an impact on the overall index. Combined with the way in which Apple’s sales have meaningful implications for both the service providers that support their product (ie. phone companies), and its suppliers, the equity markets are particularly geared up against the movements of Apple’s sales.
After looking at the overall equity markets, we can see how it is that the economies out in the Asian markets have created volatility through aggressive currency policies and declining demand. China, for example, has seen continually declining growth, which bodes poorly for commodities such as Oil and Copper, as well as growth in consumer products. Interestingly enough, fast food companies that have previously seen phenomenal growth in China consistently for years on end are suddenly seeing declining results from consumer demand overseas.
From there, the Japanese government’s aggressive devaluation of the Yen has created a situation where both exporters and importers are struggling to adapt due to the sheer speed of the policy. While exporters adjust to purchase more expensive suppliers, they are being met with internal inflation impacting their personal costs of living. The end result is again a decline in demand for the industrial goods that are used to produce their end products.