6 February 2018

Cogito Ergo Non Serviam

Stock Market Loses All of This Year's Gains

The last couple of trading sessions have left blood on the floor of the stock exchanges. The Dow Jones Industrial Average fell aroun 600 points on Friday, and it closed yesterday with its largest point loss ever of more than 1,100. At one stage, it was off more than 1,600. All of the gains this year are gone. Others bourses around the world showed similar declines. While a financial meltdown like 2007-08 seems unlikely, this isn't good news for equities nor for politicians who claim credit for the market's rise since 2018 began.

The first thing to notice is that a 10% dip is the definition of a market correction. They historically occur on an annual basis. There has not been such a correction on the major exchanges for much longer than that. In other words, this is overdue. Markets do not rise in a straightline, and the fall here doesn't seem to be extraordinary save possibly for its pace.

The second thing to observe is the reasons for the decline. They make perfect sense. The US is at or very close to full employment. This means future earnings will not rise at the same pace as before because businesses will have to pay more for talent, or they will have to scale back on growth plans. Furthermore, the Fed is always nervous about inflation, and for once, there is reason to think that demand-pull inflation is more likely than deflation. So an interest rate hike to hold off rising prices is inevitable. That's always bad for stocks.

The third thing to keep in mind is that the market is only down depending on where one starts drawing the line. Since Thursday, it's way down. It's flat for the year. If one starts in mid-November of 2017, just three months ago, the DJIA is up 100 points. And since March 9, 2008, it's roughly tripled in value.

A final issue is the proportions. Losing 1,700 points from an index around 25,000 is serious, but it's small compared to the 1987 declines that were smaller when measured in points and bigger as a percentage loss. And 1929 was even worse. 

What is particularly troublesome, though, is the political fall-out. Numerous governments take credit for economic booms over which they preside. Rarely are those good times the result of government policy. Indeed, while the Fed is tightening credit, the Republicans have just cut taxes in an expansionary policy. Both can't work.

The Trump administration  been particularly bold in taking credit for the gains of the stock market. Since the administration didn't actually pass any legislation or implement any major policy until the tax cut in November, the best one can say is that the current crowd had the good sense not to mess up the Obama economy. Yet having taken credit for an increase that occurred on its watch, it cannot run from the fall either. One expects the president to start complaining any minute that the fall in stock prices is unfair to him.

© Copyright 2018 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.