The historic record-setting one day point drop for the Dow Monday was largely hailed as positive, a needed correction. It has also been called healthy even though there was certainly fear in the market and an associated drop in 401K’s. Economist Arlan Suderman says the stock market had gone too far, too fast without a correction.
“The underlying economic numbers are still strong, they’re still solid,” he told HAT. “There was a sense that this was eventually going to come and that fear that it was going to come almost help precipitate it. The algorithmic traders kicked in, the computer traders in other words, and it just accelerated down. Usually when you get a big flush like that but you have underlying, solid fundamentals you get a healthier recovery.”
Suderman says the bloom is off the rose, as in the stock market, but he does feel it will continue to recover and possibly over time to new highs. In the meantime, commodities can benefit.
“You’ll probably see some money rolling into alternative investments now. That does include government securities, but the commodities are also well poised to capture that. A healthy economy creates demand for commodities, and if the dollar in particular continues to trend lower, I think that sets up the commodities to be a very attractive alternative now for the equities.”
The chaos ultimately did impact the grain markets. Monday night the VIX index spiked to its highest level in two and a half years.
“When the VIX, Wall Street’s fear index spikes like that, fund managers pull back,” Suderman explained. “They don’t really want to have big long positions in any asset unless that asset has a compelling story. But as the VIX started to calm down, that’s when the money started coming into the grains which are at the low end or undervalued end of the commodity sector.”
The VIX returned to historically normal levels Wednesday and commodity markets started selectively coming back as early as Tuesday.
Suderman is Chief Commodities Economist for INTL FCStone.