Volatility on Wall Street: correction or concerning?
Eric Parks, Section Editor
Since reaching an all-time high on Oct. 3, the Dow Jones Industrial Average, commonly referred to as the Dow, has dropped almost 5 percent in the month since and as much as nearly 10 percent earlier in November. This recent slump on Wall Street has many investors contemplating whether it is a normal correction, or an indicator that the United States is about to enter a recession.
There are always a lot of things that impact Wall Street, and the U.S. economy as a whole, but the past two months have been especially active. Midterm elections, trade talks, potential interest rate hikes, and many other factors have caused some investors to sell their shares, while inspiring others to take advantage of lower stock prices. There has been a great debate about whether the past two months have represented a healthy correction, or a sign that the US economy is about to enter into a bear market or recession. A correction is defined as stocks falling 10 percent from a recent high, and normally lasts for a few months. Bear markets are a drop in stock prices from a recent high by 20 percent, and normally last a year and a half. Bear markets are normally accompanied by recessions, which are two consecutive quarters of negative Gross Domestic Product (GDP) growth.
While it is important to understand that the stock market and the economy are not the same thing, and can act independently, the stock market is often used to measure the strength of the economy, and they normally rise and fall together. It is important to study current events when speculating what might happen in the market next. One of the most important recent events was the midterm elections. Elections almost always impact Wall Street because new politicians bring new policies that can help or hurt different sectors. With the Democrats taking the House of Representatives, many investors fear that a divided congress will encourage further gridlock, which could prevent necessary legislation from being passed to ensure that the current growth of our economy is sustained, and does not get out of control.
Another major series of news stories report President Trump’s recent actions on trade may affect the stock market. In October, the US, Canada, and Mexico signed a trade agreement that is intended to replace NAFTA. Trump also announced a major increase in tariffs against China ahead of his meeting with Chinese President Xi Jinping that took place on the weekend of Dec. 1. The tariffs on $200 billion of Chinese imports are being raised from 10 to 25 percent, and additional levies are being placed on the other $267 billion of Chinese goods that currently do not have a tariff. Trump is using the tariffs not only in attempt to even the playing field with China, who he feels has not played fairly in recent years, but also as a negotiating tactic to force China to agree to a long term trade solution that works for both world powers. While these tariffs will undoubtedly hurt China’s economy, American investors and economists are split on whether or not the tariffs will be worth it for the United States.
Brian Messing, a junior at Saint Martin’s, shared his recent investing experience. “Volatility on Wall Street has been great recently for short-term speculation. I have personally had some amazing returns over very short periods of time, in some cases as short as two days.” Many other investors have attempted to take advantage of Wall Street’s volatility in a similar manner, yet others have began to sell their assets in preparation for Wall Street to collapse. While the market in general has been volatile, specific industries have fared far better than others. Health care stocks have had success over the past two months, while falling oil prices have caused oil and energy stocks to suffer; however, transportation stocks maintain strength. General Electric, commonly thought as a “blue-chip” stock, has come close to setting record lows.
Since the Dow has only fallen 5 percent from its record high, many economists feel that the American investor has nothing to worry about. They argue that it is natural for Wall Street to experience short negative runs even when the economy is strong, and they mostly blame the “October effect” for this minor correction, which states that stocks tend to decline in the month of October. Additionally, the Federal Reserve recently announced that interest rates are close to neutral, and that a potential December or January interest rate hike could be the last one for a while, which is good news. Other analysts note that the October effect is more myth than fact, and are worried that the recent volatility is a sign of worse things to come. They fear that government gridlock and souring trade relations with China could negatively impact the American economy, and that since we are currently in the longest bull market since World War II, the economy is naturally due for a setback.
There are a couple major things to look for in the near future. The outcome of President Trump’s meeting with China could significantly impact the trade outlook for the United States and its economy. The November jobs report will be released soon, and Wall Street normally takes large note of that, since unemployment rates and labor costs, which are outlined in the jobs reports, significantly impact the economic outlook. With all of these recent and upcoming events, amateur investors should proceed with caution and seek professional advice about what to do with their current portfolio.