In theory, yesterday’s record 1,175-point plunge in the Dow Jones Industrial Average shouldn’t be that worrisome, despite the fact that it is historic. For one thing, a new Federal Reserve chairman, Jerome Powell, took over yesterday, and the market has a way of testing new leaders with significant drops. For another, the plunge followed an all-time high for the Dow, reached on Jan. 26, so it’s not like we’re anywhere close to a massive plunge. For a third, there’s no concrete explanation for why it happened (ie, a housing bubble), and the concrete explanations that do exist, such as accelerating inflation that triggers higher interest rates, remain mysterious in origin. For a fourth, the DOW corrected in a big way today, so the crash has been reversed, at least temporarily.
All that being said, there’s a deeper concern—nobody seems to know what will happen next, including the experts. Words like “volatility” are common, but predicting volatility in the stock market is just another way of shrugging your shoulders and saying “things aren’t stable anymore.”
The New York Times is calling this flash-crash the end of the “era of easy money,” and Peter S. Goodman outlined the dangers of a market that seems to never go down:
But when the party gets raging — when economies accelerate and stock prices ascend to levels out of whack with fundamentals — central bankers play killjoy, lifting interest rates to snuff out attendant dangers.
Higher rates diminish speculation that can end badly by making credit more expensive. They slow economic growth while making stocks less appealing, because corporations must pay more to keep up with their debts. Investors can make more just by keeping their holdings in cash or bonds, rather than by accepting the higher risk of stocks.
Goodman also noted that a proximate cause of the drop was, ironically, wage increases for workers. Paste’s Roger Sollenberger made the same point on Tuesday, noting that rising wages may signal lower corporate profits, more money circulating in the economy (which devalues the dollar), and triggers inflation and higher interest rates. It works the other way too, with boom times in the stock market coinciding with rising wealth inequality. In other words, “the markets don’t want what we want.”
That’s as close as we can get to a definite explanation, but what about the future? So far, the best anyone has to offer is a massive “ummmmmm….” MarketWatch managed to assemble a group of experts giving opposite advice, and for every article saying it’s a mere correction (or something even less), there’s another worrying about rising inflation that the Fed won’s successfully control, leading to potential global collapse.
And the advice is even less clear—show risk tolerance, but not too much, don’t panic sell, but don’t hold against common sense, etc. etc. Bromides, bromides, bromides. For most stockholders, and for anyone participating in the American and global economy, it seems like the best and only course of action is to wait and see.