Last week was a nightmare for investors and speculators with most stock markets across the world dropping. The plunge was led by the Dow Jones Industrial Average which saw its two worst drops ever. Despite all the panic, a majority of the analysts feel that tumble was actually needed. Here are some of the views about last week’s debacle.
The Guardian’s Larry Elliot reported that the markets nosedived these last few days for the same reason that it spiraled so high – because of economic growth. The trigger for the downward descent was the US Labor market report, which showed that more jobs were being created, wages were increasing and unemployment was down to 4.1%.
This data caused a huge panic as people felt that this would cause the Federal Reserve to increase interest rates. The new tax cuts which had been touted as a booster for further growth now are being viewed as the cause for the economy overheating and pushing up the US budget deficit.
However, Elliot feels that these suppositions are quite accurate. Wages rose, yes, but mostly for those in senior positions. The bottom 83% of the wage earners barely saw a 2.4% increase in wages. And while the central banks are definitely keen to raise interest rates, they have also repeatedly stated that this would be done incrementally and in very small amounts.
According to CNBC, too much of a good thing is also bad. The news agency’s analysis focused on the fact that historically, when there was extremely high profit growth (as was seen throughout 2017), a correction was actually a good thing for the markets. When even strong profits fail to impress, then the concern is that the market is overheating. According to the equity and quant strategist at Bank of America Merrill Lynch, Dan Suzuki, when the data from the previous years’ earnings are analyzed, a clear pattern emerges that when growth and earnings go into double-digits, the chances of having a down market are higher than in years when growth and earnings are not so intense.
Case in point is 2018. The year so far has shown that more than 80% of the companies have released earnings data that have beaten all market estimates. Last year showed a 13.4% growth in earnings, with the fourth quarter being especially strong. These gains have spilled into the New Year, making 2018 one of the strongest years since 2008.
And that is what is challenging. Suzuki states that in these conditions, markets are actually more vulnerable. So, at this time, a stock market tumble is actually what was needed to cool things down.
According to Forbes, optimism about a bull market is not fading right now. The news report said that while last week’s tumble was a correction, it certainly wasn’t a correction phase. Which means that the bull market optimism will continue for some time yet. The news magazine had already predicted in mid-2017 that a market correction was needed to stabilize the abnormally obstacle-free rise of the stock markets in the last one year.
Forbes also said that the fear about rising interest rates from the Federal Reserve is a necessary step for the growth of a healthy economy. The central bank isn’t tightening credit by increasing interest rates. Rather, it is moving away from the seriously low rates and controls and is again giving the markets a say on what the appropriate interest rates should be.
The bottom line is that the economy is healthy, and this correction was a necessary step for further growth.