Two obvious forces behind the recent volatility are uncertainty over China and the Federal Reserve.
So what was that blowing through Wall Street and world markets last week?
Worry over China? Selling in New York turned into a mini-flash crash by algorithm-driven automated trading? Interconnected markets feeding off each other’s fears and exposure? Nervousness over U.S. stock prices after a long bull market? Markets go up and markets go down?
Yes.
Stocks went into a severe dip early last week. By Wednesday, markets had steadied and rallied. By Friday, confidence remained and for a day, the major indexes were almost unchanged.
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This isn’t the end of volatility. Traditionally turbulent September awaits.
If we’re lucky, this is a correction. Even so, there’s plenty to see, so don’t move along.
True, Wall Street isn’t Main Street. A roaring stock market hasn’t translated into a booming labor market or better wages for most Americans.
But if shares were to go into sustained bear territory, people in 401(k)s and other small investors would be among the worst hurt. The toffs would be only a little less wealthy.
Share prices doing worse than correcting would translate into layoffs and canceled or deferred investments that create jobs.
If panic selling were to continue, it could cause a contraction or recession. Don’t forget the Too Big to Fail banks are still there, too, ticking. At least a stop would be put to complaints over Seattle’s prosperity or who “killed” the city.
So like it or not, those stock indexes do matter.
Yet we are all in debt to the great economist Paul Samuelson, including for his priceless axiom, “The stock market has forecast nine of the last five recessions.”
Two obvious forces behind the recent volatility are uncertainty over China and the Federal Reserve.
China has experienced astonishing growth over the past 25 years. Especially since joining the World Trade Organization in 2001, this has created many losers among American factory workers.
But for U.S. corporations and a trade state such as Washington, it has been an enormous plus. China is the No. 1 destination for Washington exports.
Yet the evidence is accumulating that not only is the powerful growth of the past gone, but the “new normal” could be much weaker than anticipated. The situation was serious enough to cause China to devaluate its currency to goose exports.
China also faces a property bust, banking troubles and the government artificially propping up the stock market, which has become essential to so many average Chinese in a nation without an advanced safety net.
Not everyone buys this argument. Yale’s Stephen Roach, former chairman of Morgan Stanley Asia, wrote on the Project Syndicate blog that Western commentators are mis-framing the situation “in terms of the proverbial China hard-landing scenarios that have been off the mark for 20 years.”
Instead, he contends, change is happening on multiple fronts, including President Xi Jinping’s anti-corruption fight and goal to raise a consumer and services economy. “Is China’s leadership up to the task, or has it bitten off too much at once?” Roach asks.
The Fed has underwritten some of the bull market with low interest rates. While investors have had plenty of time to price in a modest rate hike, questions remain. One is whether the Fed can pull it off smoothly.
Before he was disgraced for his role in deregulation of the big banks and the easy money that helped cause the Great Recession, Alan Greenspan seemed to pull off these soft landings with élan. The best of the Greenspan years were “the great moderation,” low inflation but decent and even strong growth.
Janet Yellen faces a very different environment as Fed chair. Potential bubbles are emerging in some parts of the economy, such as tech stocks. But employment has not fully recovered. GDP growth was revised to a strong 3.7 percent in the second quarter, but is this sustainable in a slow-growth world?
Inflation is very much in check. Deflation is another, concerning matter.
Prices going down sounds appealing. Unfortunately that includes the price of your labor, too. Deflation was a major driver behind the misery of the Great Depression.
We’re nowhere near that crisis, but deflation is at work in parts of the world, including the eurozone and, arguably, China. This is rippling out as very slow growth and price collapses for commodities, especially oil.
Drivers and other transportation should benefit. But layoffs are growing in the Oil Patch, producers face half a trillion dollars in debt that must be repaid and, underneath the price fall, is a stunning drop in demand.
All this and more are at work when the trading begins Sunday in Shanghai and the widening gyre starts all over again.