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By Nancy Kaufman
Observer Staff Writer 

God Forbid, A Stock Market Crash is Ahead. Maybe. Or Maybe Not

There are psychological reasons for this 2018 correction, as were for the crash of 1929

 

February 13, 2018

There are psychological reasons for this 2018 correction, as were for the crash of 1929

A month before Wall Street's recent correction shared media headlines with all things Trump, columnist David Von Drehel of the Washington Post said that a recession, slump, or "God forbid a crash, " lay ahead. Drehel might have been prescient, but let's hope last week's plunge won't turn into a full-blown crash.

The good news of the January jobs report (https://www.bls.gov/news.release/pdf/empsit.pdf)

brought sunshine to the economy, along with a hailstorm for the market as the Dow Jones dipped 1, 175 points last Monday, and 1, 033 points Thursday, making those two days the largest and second largest single day drops in the history of the United States stock market.

Friday saw a slightly better day, a reprieve from the plunge, when the Dow closed up at 335. Still, the roller coaster ride doesn't seem over; there are several factors at play that has brought down the market, and just as President Trump was not entirely responsible for last year's 26 per cent surge, he's not the direct culprit of the fall.

When the market was surging, Trump touted himself, as if he were Midas of Wall Street. Since it slumped, he's been pretty silent, other than the tweet, in which he said, "Big mistake, and we have so much good (great) news about the economy!"

December's tax cut bill that Trump signed, brought with it a huge corporate tax break that could overheat the economy. This in turn, could lead to the Fed cooling it down with interest rate hikes, as a way to calm the pace of inflation.

Since wages have risen 2.9 per-cent according to this year's jobs report, and unemployment is at a two year low at 4.1 per-cent, and there is a new Chair, Jeremy Powell, in the Fed, panic spread like wild fire in the Street.

So how does this affect regular people? When unemployment drops and wages go up, there's a feel good economy for most Americans.

Although the stock market's not part of most peoples' everyday lives, there are indirect ways in which the market impacts the middle class, or the 90 per cent.

Since only 10 per cent of the population own stocks, the majority of consumers will not be directly impacted by these crazy fluctuations and volatility of the stock prices.

When green turns to red, heads fly on Wall Street, folks on Main Street may want to hang on and ride out the storm. After all, many Americans have pension funds, such as a 401 k.

In this recent sell off, about two per cent of their retirement fund might have been shaved off. For those whose pensions are their income, if the prices of their funds are down, that means a fall in their income as well.

Since the economy is doing well, as was reported by Trump in his state of the Union address last month, it's a bit ironic that the market fell so dramatically last week. Even more interesting is that the investors concerns about rising inflation and interest rates that actually reflect a healthy economy, has given rise to the fall of the stock prices.

There are psychological reasons for this 2018 correction, as were for the crash of 1929. Perhaps this is the stock market's mystique, and one might prefer to be Keatsian http://www.keatsian.co.uk/negative-capability.php

rather than Keynesian in this matter, and subscribe to "negative capability," in which one lives with uncertainty.

The strange thing about all of this, is how can the government be running up a 1.5 trillion dollar deficit from the recently passed tax bill, and a fiscal policy of expansion, with infrastructure, the border wall, advancing our nuclear arsenal military spending, when the economy is in surplus mode?

It doesn't make sense that when unemployment is at an all time low, that the government is engaging in an economic stimulus package that will lead to an enlarged deficit. The Fed might have to step in and take charge with its monetary policy; this means offset the government's spending spree by increasing interest rates. After all, someone will have to stop the bleeding.

What's odd is that usually the deficit spending goes up during bad times, not good times, when the economy needs a lift.

Although neither the president nor the law makers cannot directly affect the movement of the stock market, they can be judicious in their policy making decisions, by not over-spending to the point that it will ricochet off the investors' backs.

The president also must remember, that although Wall Street is not sewn at the economy’s hip, whatever fiscal policy is created, that it could, like the butterfly effect, impact the actions of the investors.

With all this uncertainty, people will just have to hold on to their hats and their pensions and wait and see what happens.

 

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