We have our story straight. Monday’s Wall Street mini-crash was a healthy correction, a pause that refreshes. The refrain is to keep calm and carry on, and buy when there is blood in the streets.
That is the consensus from Wall Street after Tuesday’s rebound saw US stocks log their best gain for the Trump presidency. The Vix index, after its greatest percentage increase to exceed 50, is back below 30. And while a “dead cat bounce” is to be expected, this was far bigger than average. According to Bespoke Investment, the S&P 500 historically averages a gain of 0.32 per cent the day after falls of 4 per cent or more.
Optimists make two other points, which both have some validity. First, valuations have corrected healthily. The gains in January were almost entirely driven by huge tax-cut-fuelled rises in earnings and earnings forecasts. With stock prices back roughly where they started the year, the prospective earnings multiple on the S&P as measured by Bloomberg has dropped from 20 at the turn of the year to a far more reasonable 17.3. After a rather disorderly process, this can be seen as a sensible reaction to rising bond yields and inflationary risks.