Coverage: Markets headed for more tumult this week

A jarring week that rattled financial centers from New York to Hong Kong and wiped out almost $5 trillion from stock markets is likely to continue this week.

Lu Wang of Bloomberg News had the story:

Whether the downdraft goes down in history as a mere hiccup, or spells the end to one of the longest bull markets in recent memory is, of course, anyone’s guess. But in just a few short days, the breathtaking volatility that shattered the market calm has investors scrambling to make sense of it all.

Across Wall Street, analysts are nearly unanimous: the U.S. economy is humming along and corporate profits look robust, so equities, regardless of the near-term correction, are a buy. Yet valuations paint a more somber picture, and one that suggests there’s still room to fall before stocks find their footing.

“There is a ‘macro floor’ — in that the run of macro data is still strong,” said Inigo Fraser-Jenkins, who leads Sanford C. Bernstein’s global quantitative strategy team. “What we do not have is a valuation floor.”

One such indicator is called the Fed model. It compares the relative value of equities to fixed income. Going by that, the message isn’t reassuring. Even after the rout, the math shows the S&P 500 remains less attractive than it has been 82 percent of the time since the index bottomed in 2009 when compared with yields on U.S. Treasuries.

Mark DeCambre of MarketWatch.com looked at what’s causing the turmoil:

Downturns in the market are normal, but what has gripped investors over the past several sessions was abrupt, stunning and savage.

So: What happened? CNBC’s Jim Cramer, no stranger to expounding vociferously on market moves, blamed the collapse on what he described as a “group of complete morons” trading leveraged volatility products and thus “blowing up” everything.

Although there are no obvious catalysts for the recent events, here are some other suspects market participants point to as contributing factors, during a period in which U.S. business sentiment, the job market and economic growth appear strong:

Some on Wall Street have pegged the start of this downturn in the market to signs of inflation, after a long dormancy, rising to near the Federal Reserve’s 2% annual target. The fear is that rising costs will prompt the Fed to raise interest rates more aggressively than via the three or so interest-rate increases the market is betting on for 2018. Rising borrowing costs can stymie corporate growth (if economic stimulus doesn’t jolt the economy as hoped).

Tony Owusu of TheStreet.com reported that the Federal Reserve doesn’t yet seem worried:

The vicious drops didn’t seem to worry Federal Reserve officials though. Dallas Fed President Robert Kaplan said Wednesday that the recent selloff is basically a “market event” which could be “healthy.” Kaplan joined former Fed chair Janet Yellen and St. Louis Fed President James Bullard in saying that market valuations were high.

So the question is after a week where investors withdrew a record $30.6 billion from global equity funds, the S&P 500 lost more than $2 trillion from its market cap high, and all three major indices lost more than 5% of their value, when will the Federal Reserve start worrying?

Deutsche Bank Senior Economist Matthew Luzzetti has an idea.

“When does a ‘healthy’ correction become unhealthy and cause the Fed to scale back its rhetoric at the very least, and potentially even its expectations for rate hikes this year,” Luzzetti asked in a note Friday. The answer: a 16% correction for an extended period of time.