What’s Happened to the Stock Market?

It’s been quite a downhill ride on Wall Street recently.  Last Friday, the Dow industrials fell 530 points and lost 3.1% of its total value.  Monday was even worse.  The Dow industrials followed that slide with an even bigger decline, losing 588 points or 3.6% of its total value.  What caused these huge declines?  Was it China and its currency devaluation?  What is the Federal Reserve and their hinting at raising interest rates?  Was it falling oil prices?  Or, possibly worry over the Iran nuclear deal and potential war in the Middle East?  Let’s talk now about what’s going on in the stock market …

What’s going on with China?

For starters, China devalued its currency recently.  By itself, that move should not cause a stock market crash.  But, for some investors, the devaluation signaled that China’s economic growth and economy might be slowing down.  Because China has such a large impact on the global economy, this action spurred fears that the entire global economy might get hit and there might be a global economic slowdown.  The Shanghai Composite in China fell 8.5% on Monday, a negative sign.  That adds to concerns for investors.

How does currency devaluation impact other markets around the world?  When China has to pay more for goods and services, it has to cut back on goods and services.  There is less money in people’s pockets, so-to-speak.  If China overall buys less actual goods and services, trade revenues to other countries will decline.  Thereby, impacting the global economy.

One other cause for concern relative to China were reports that the Chinese central bank planned to “flood” their economy with liquidity, hoping to spur investment in China’s private sector economy.  Recall that State-owned industries are already heavily invested in with cheap money (yuan).  The private sector typically pays more for its investment capital.

One other issue for the Chinese.  China has a State-owned company whose objective is to bolster stock market prices.  From an economic point of view, that’s not a good idea.  It works against the positive effects of a free market.  China announced that this State-owned company would not purchase stocks every day.  Note that in the attempt to control prices, China might have to purchase controlling interests in all or most of some companies or entire industries.  The results, of course, are communism and State-controlled production.  That approach won’t work as we know from either economic theory or from actual practical examples.

What about Europe?  What about Greece?  What about Russia?  What about Oil Prices?

In Europe, the pan European Stoxx Europe 600 dropped 5.3% and Germany’s DAX dropped 4.7%.  So, the widespread nature of the decline in stocks globally certainly added to investor nervousness.  Greece has received some attention in the last few months as they wrestle with their fiscal problems.  But, it is unlikely that Greece was the main trigger for the Dow sell-off on Friday and Monday.

Russia is a special case.  The Russian economy is heavily dependent on the price of oil.  Low oil prices tends to hurt Russia’s economy badly.

What about the Federal Reserve?

As I have pointed out many times, Qualitative Easing (QE) was an unproven attempt to regulate the economy.  In the long run, I think it will be hard to unwind QE1, QE2 and QE3 and they might cause inflation and asset bubbles.  Some probably would call the stock market leading up to the recent declines an asset bubble.  The problem with asset bubbles is that they can break, and hurt investors.  Recall the housing bubble of a few years back.

Instead of the QE strategy, the Federal Reserve needs to use a rule-based strategy to manage the money supply and inflation.

What about Stock Fundamentals?  What about the Economy?  What about How Citizens Feel about America under the Current Administration?

Some investors believe stocks have been significantly overvalued.  This could in part be caused by the QE policies of the Federal Reserve or from the state of the economy in general.  The stock market has been one place you could invest money in recent years and get a return on that investment.  The current sharp declines might be a true correction to an overvalued stock market.

Of course, I have been saying for a long time that this economy is not doing that well.  It’s a very anemic economy and it’s a very lackluster recovery in contrast to normal recoveries.  Investors might finally be starting to look at the economic numbers in detail and not just listening to the upbeat mainstream media who are trying to pump up the economy and downplay the obvious problems, like nearly 94 million American of working age who are not working.

Americans are coming to realize that America has serious problems.  In a recent poll, about 2/3 of Americans believe the nation is on the wrong track.  They might be re-evaluating the economy, their personal budgets, and the stock market.

For More Information

For more information, please read my blog posts on GerardLameiro.com or any of my books.

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