Investors are worried that rising inflation might push the Federal Reserve to raise interest rates more quickly, which could slow down economic growth by making it make it more expensive for people and businesses to borrow money. The highest bond ...
That was quick! In the course of two days, the “Trump Bump” in the stock market has turned into the “Trump Slump,” with the Dow Jones Industrial Average falling more than seven per cent. At one point, on Monday afternoon, it looked as if we might be witnessing not merely a slump but an outright crash. In less than ten minutes, the Dow fell nearly a thousand points before quickly rebounding. It closed the day down “just” 1,175 points, or about 4.6 per cent, at 24,345.80.
Obviously, this was a big fall: in absolute terms, it was the largest points drop ever. But it needs to be placed in the perspective of stock-market history—on Black Monday, October 19, 1987, the Dow fell twenty-two per cent—and also of the record-breaking run-up that preceded the past few days of declines. Between December 29th and January 29th, small investors piled into the market, and the Dow tacked on close to nineteen hundred points, racing past twenty-five thousand, and then twenty-six thousand. On January 29th, the index closed at 26,616.70. The slump during the past week has wiped out the January run-up, and the market is now down a bit on the year. But people who looked at their 401(k) accounts on Monday night won’t have noticed much of a difference from the end of 2017.
For investors, that’s the good news. More worrying is the fact that there is no way to know whether the correction will end here. The market has been looking frothy for a good while now, and a substantial fall was inevitable at some point. Just as upward movements in stock prices can be self-reinforcing, drawing more people into the market, so can falls in prices. Much will depend on how ordinary investors react to the dramatic movements on Friday and Monday. If they decide to cash out some of the gains they’ve made in the past nine years, there will be further falls.
During the Dow’s recent rapid rise, a more responsible President than Donald Trump might have pointed out the dangers of the market overheating, or even kept silent. But that’s not Trump. As stocks soared, he gloated, and insinuated that his policies were responsible. “Stock Market at an all time high. That doesn’t just happen!” he tweeted in August. Only last week, in his State of the Union speech, he said, “The stock market has smashed one record after another, gaining eight trillion dollars in value. That is great news for Americans’ 401(k), retirement, pension, and college-savings accounts.”
Having boasted as the Dow was rising, Trump can hardly complain if people now associate him with it as it falls. Indeed, a fear of being held responsible for a downturn on Wall Street was one of the reasons that Barack Obama didn’t boast much about the market’s rise, which began way back in March, 2009. If “you claim the rise, you own the fall,” Jay Carney, Obama’s former spokesman, said on Twitter on Monday.
In actual fact, the link between Presidential policies and the stock market is indirect, and often tenuous. On this occasion, the trigger for the market sell-off wasn’t anything Trump did: it was last Friday’s employment report from the Labor Department, which said that strong job growth is continuing and wages are finally picking up a bit. (In December, hourly wages rose at an annualized rate of 2.9 per cent.) For the majority of Americans who don’t own any stocks, that was excellent (and long overdue) news. But it raised fears that the Federal Reserve might raise interest rates more rapidly, which could, in turn, choke off the economy. And that’s what spooked investors.
Quite possibly, there was an overreaction. With inflation still running well below the Fed’s target rate of two per cent, it seems highly unlikely that the new Fed chair, Jerome Powell, will deviate anytime soon from the gradualist course established by his predecessor, Janet Yellen. (Monday was Powell’s first day in his new post.) But, with stocks trading at such high levels, they were always going to be vulnerable to some unexpected news, particularly on the inflation front.
As long as the stock market sell-off doesn’t turn into an outright panic, or threaten the health of a big financial institution, the Fed will probably welcome it as a necessary correction. Over the weekend, in the final interview of her tenure, with CBS News, Yellen noted that the price-to-earnings ratio, a commonly used valuation measure for stocks, is at the very high end of its historic range. “Now, is that a bubble or is it too high?” she went on. “And there it’s very hard to tell. But it is a source of some concern that asset valuations are so high.”
To the extent that a sell-off reduces the threat of a full-on bubble, it will make Powell’s job easier, and also make it less likely that this economic cycle will end in the same way the previous two did—with a crash. It could end up giving the Fed more leeway to hold off on further interest-rate increases, which would be good news for America’s workers, many of whom are finally getting a raise.
But don’t expect Trump to look at things in this way. He lives in the moment and, even during his darkest days in the Oval Office, the stock market has given him something to crow about. For some reason, he didn’t mention it on Monday.
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