Wall Street plunge sends a shiver

BY Iain Martin | iainmartin1   /  5 February 2018

What goes up can come down. The US stock market had been soaring but on Monday it suffered its worst day since the financial crisis of 2008. Volatility has spiked. Today the Dow Jones average closed at 24,342, 4.6% down. At one point it was down 1,500 points. It recovered a little to close 1,175 points down.

This is one of those moments for newspapers around the world to dig out pictures of Wall Street traders staring up at screens and looking worried.

But what just happened? Isn’t the US economy, and the world economy, doing better? Yes, the drop has its roots in good news and fears among those in the markets about what the US Federal Reserve will do to dampen the exuberance. On Friday, the US recorded year on year wage growth in the private sector of of 2.9%, the best in almost a decade. That suggests a burst of inflation that central bankers will deal with by using the main tool they have available, that is increasing interest rates. The post-crisis era of cheap money has long been said to be over. Now investors fear it really is over. Investors like to party with cheap money and borrowing money is going to be more expensive.

The US economy has certainly been growing strongly, a process that began under Obama and has continued under President Trump, although Trump obviously claims all the credit. Of late Trump has been highlighting the booming stock market, a tactic which can backfire.

Today, Jay Carney, the former White House Press Secretary under Barack Obama, pointed out:

“Good time to recall that in the previous administration, we NEVER boasted about the stock market – even though the Dow more than doubled on Obama’s watch – because we knew two things: 1) the stock market is not the economy; and 2) if you claim the rise, you own the fall.”

That is a fair point.

But The Washington Post’s Heather Long makes the case that this is not the time for American investors to panic. Stocks have risen so much in the last year – at least 25% – that there was bound to be a correction, a phenomenon she compares to touching the brake to correct excessive speed.

The White House said that the “fundamentals of the US economy are strong” – which is what political operations always say when they are terrified of a crash and trying to keep people calm.

Stock market crashes do not always presage deeper economic crises, it should be noted. The stock market is not the economy. The crash of October 1987 was seen at the time as the new 1929, but after the panic it became clear it wasn’t and markets powered on.

Confidence is all, though. And panic is infectious. Markets, as the 2008 crisis demonstrated, are even more inter-connected thanks to technology and globalisation than traditionally was the case. Worse, as the historian Niall Ferguson has pointed out – Look up: financial red lights are flashing again,  in November and Republican smiles may soon turn to grimaces, last weekend – the long monetary policy party coming to an end will have consequences. Let’s hope what is coming down does so in an orderly fashion…