Markets had a bit of a round trip yesterday.
The US had a panicky crash halfway through the day. As a result, by the time all the European markets had shut, they were at their lows for the day.
Yet the US then decided that the sell off was overdone, and rebounded. So we'll no doubt see something similar this morning in Europe.
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I have to say the UK is starting to look very tempting.
A very scary day for markets
Yesterday, the FTSE 100 fell to its lowest level since December 2016 and European stocks in general suffered their worst one-day fall since the Brexit vote more than two years ago.
This time around, it wasn't specifically about Brexit other markets, most notably the German market, are suffering too. In fact, Germany is now in a bear market (having fallen by more than 20% from its most recent high) whereas the UK market is still just in "correction" territory (down by more than 10%), despite enjoying a bit of a bounce this morning.
What does that suggest? We noted yesterday that one reason for the sudden burst of fear was the arrest of an executive from Chinese telecoms giant Huawei. That made the good cheer that followed the apparently cordial meeting between Donald Trump and Xi Jinping in Argentina at the weekend appear a bit premature.
Germany is one of the markets that's perceived to be most at risk from a global growth slowdown led by China. That would certainly help to explain why it and China are among the worst performing stockmarkets this year.
Of course, the FTSE 100 also has more than its fair share of growth-exposed cyclical stocks (all those miners, not to mention the oil majors, who are being battered about by the falling crude price).
There's also the financial sector, which doesn't enjoy the sight of a flattening yield curve. Broadly speaking, banks make money by borrowing short-term and lending long-term, so if there's little difference in cost between the two, their profit margins get squeezed.
So there are plenty of reasons you can give to back up this sell-off, and they all sound credible.
But as I said yesterday, the fundamental issue at the heart of the current concern, is that markets are having to get used to a major shift in the tectonic plates of finance. Interest rates have been going down for decades. Now they are going up.
The current turmoil in markets boils down to this: they can't quite work out what this means as yet.
The market needs to find a new story. Meanwhile, UK stocks are cheap
Rising interest rates don't have to be bad news for asset prices. It rather depends on why rates are rising.
Keeping it simple, if rates are rising because economic growth is strong and inflationary pressure is building, then that doesn't need to be a bad thing. Debt will get more expensive, yes. Costs will go up. But if the economy is growing then earnings will grow too.
But if rates are rising because the Fed is jumping at shadows, then that wouldn't be so good. You'd get rates rising, squeezing growth, even as growth is already slowing.
To me, it seems that markets don't believe the inflation/growth story. They reckon that the biggest threat remains deflation. They fear that the Fed will tighten too rapidly. They are still feeling the hangover from 2008.
Yet they are also still hopeful that the drop in the markets will persuade the Fed to ease up on hiking rates. On top of that, while they are more jittery than they have been in recent years, they're also wary of missing yet another opportunity to "buy the dip".
Investors are terrified of another 2008. But they're also terrified of missing out on more gains. (You can see that the "buying opportunity" mentality is starting to return to the big tech stocks now, for example.)
I think until the market has a clear steer on which "story" to believe, we'll probably see continued volatility.
But getting back to the FTSE 100 specifically we're looking at a market that is now close to 20 years without any capital gain. Now, that only carries so much meaning in an index that pays relatively high dividends if you look at total return (ie, with dividends reinvested) then your return is much better. But it's still a striking statistic.
And right now the market is trading on the highest dividend yield we've seen since the financial crisis. Sure, some of those dividends might not be paid. But I have to question whether the overall scenario is as high risk as it was back in 2008, when every bank and housebuilder had literally no chance of paying their prospective yields.
You can paint a lot of ugly scenarios. But I'm struggling to figure out which ones would be drastic enough to justify the market sitting where it is right now.
Taking a cursory glance at some of the key sectors in the market miners have been chastened by their experience of the 2011 commodities bubble; banks have been chastened by the 2008 bubble; oil majors have been chastened by the 2014 crash; big pharma is its usual boring self.
I am absolutely not claiming that there are no potential problems. And I'm also sure the FTSE 100 could easily get cheaper from here.
But equally, it does look decent value. So I'm going to be taking a closer look at income stocks and dividend cover in the next issue of MoneyWeek. If you're not already a subscriber, you can sign up here now you'll get your first six issues free!
