What does the Dow Jones tumble mean?

We saw turbulent times last week, as the Dow Jones industrial average tumbled more than 1,000 points on Thursday.  The Dow’s 4.1 per cent nose-dive put it firmly into “correction” territory.  It was 10 per cent lower than its all-time high, for the first time in two years. 

The rollercoaster continued into Friday, which was a day of wild swings, with early losses in the day followed by a late-afternoon rally that sent the Dow Jones industrial average 330 points higher.  But even this late rally could not stop this being the worst week for the market in a couple of years. 

The Standard and Poor’s 500 Index also veered between gains and losses.  For most of Friday we saw stocks grappling to stabilise and prices climbing and then tumbling again.  What caused the yo-yo situation and what can we expect to see going forward? Asks Dmitry Leus.

How has it come to this?  Just two weeks ago we saw record highs set by the major US indexes and we all felt the optimism coming from the World Economic Forum in Davos. 

Well perhaps we should indeed have expected this correction in the market.  Analysts have commented that there is volatility in the market and that this is leaving investors stressed and feeling uncertain and they believe this mood is likely to continue.

The US stock markets started to slump after the US Labour Department said workers’ salaries grew at a quick rate in January 2018.  It is believed that investors are fretting that increasing wages will harm profits and that such salary rises could mean an increase in inflation. 

For them, that in turn brings the worry that the Federal Reserve will opt to push up interest rates at a quicker pace, which would in turn restrain the economy.

The swings and volatility possibly also reflect that investors do feel conflicted in their sentiments.  Certainly they must feel the stimulus factor for the economy of the Trump tax cuts.  But they can’t shake off the fear that interest rates will have to bump up, right at the time when the US Government has to borrow large amounts to cover increasing deficits.

Other commentators, such as Mohamed A. El-Erian at Allianz, do not believe that the stock market troubles are so closely linked to economic concerns.  They offer other explanations, saying that this was a technically-driven sell-off rather than anything reflecting a significant deterioration of fundamentals.  

Mohamed A. El-Erian added that this kind of sell-off tends not to contaminate the broader economy as long as the fundamentals are strong, which he added he felt they were, referring to “the global economy growing in a synchronised way, strong corporate balance sheets and well-capitalised banks”.

But there is anxiety in the investor community about fiscal and monetary policy.  The US Treasury Department confirmed recently that the US Government is set to borrow almost $1 trillion this fiscal year, which is the first year that President Trump will have taken responsibility for an entire fiscal year.  To put that in perspective, this is almost double the previous fiscal year (2017).

What impact has the Dow Jones seesawing had globally? The turbulence did echo into global markets.  Asia seemed the most impacted, as Asian markets fell quite sharply after US stocks went into this correction mode.  Europe seemed to have a slightly calmer reaction.  Certainly Europe saw losses but more around the 1 per cent mark.

And what can we expect next? It does seem that investors are readying themselves for more volatility, with the common concern being that inflation will pressure central banks around the world to start putting up their interest rates which would in turn make borrowing more expensive. 

MUFG Union Bank’s Chris Rupkey, who had been more upbeat earlier last week, told investors on Thursday: “the era of low interest rates is at an end which means the proverbial punch in the punchbowl is leaving the party.  And fast!

The stock market is a leading economic indicator  and right now it points the way for the economy straight down.”  Moody’s ratings service added a gloomy note predicting that “the federal government’s balance sheet is set to deteriorate materially”.

Shanghai-based economist Andy Xie predicts:  

“The head wind blowing against markets is monetary tightening.  This kind of yo-yo situation is going to last until the U.S. interest rate rises to a normal level.”  Fasten your seatbelts.

Source EU Today

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