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We're counting down to one of the most anticipated openings of Wall Street for some time. This comes after the US equity market had its worst one-day drop in six years yesterday. What's happening, what's driving this, and can it continue?
Wall Street futures currently indicate they were going to open lower. And more importantly, the Vix, which measures implied volatility, has risen to 44. Yesterday when we began trading for the week, it was below 18. For many years, investors have been betting on volatility remaining very, very low, which indeed has been the case, until this week.
The trigger, of course, was last week's employment report from the United States. It finally showed wage gains beginning to pick up. That sent the 10-year Treasury yield, which is one of the world's most important borrowing rates for global markets, back towards 2.9%, which we saw yesterday morning. Today, the Treasury yield's back down at 2.7%, because stocks have taken a big hit.
So the question now is does it continue? Well, it does appear that investors who have been piling into some of these volatility-type positions need to get shaken out a bit more. It's also questionable whether stock markets could continue their explosive start that we saw during January. At one point, the S&P was up nearly 8% last month. It's now negative for the year. Ultimately, the economy is growing, and that's why we're going to see higher interest rates over time. We're probably going to see a more active central bank in the United States.
However, equities have rallied very, very strongly, particularly over the last 12 months, and now we're due for a pause. We probably are looking at least a 5% correction and probably are going to get a 10% correction. The key then will be are people willing to come in and step in and buy? If it's for good companies with strong balance sheets, the betting would probably be yes. But in an era of rising interest rates, companies that have loaded up on a lot of debt in recent years could face bigger headwinds.
