Stock market shocks tend to have a more immediate psychological impact on Americans than they do on Irish people because, at the risk of over-generalising, Americans are habitual investors and Irish people are habitual savers. To the average American, their “401k” – the name given to individual pensions invested in the stock market – is directly impacted by a bloody day on Wall Street. To the average Irish person, the impact is less direct, and such days are generally received as a harbinger of bad economic times to come.
The problem, of course, is that because Americans have such a more direct stake in the movement of the markets, they are prone to over-reaction. At the time of writing, the Dow Jones Industrial Average (DJIA) has fallen by about 3% – a sharp, but as yet not catastrophic, sell off.
The reasons for the sell-off appear to be twofold: First, on Friday of last week the US’s monthly job numbers were released, showing very disappointing numbers that indicate a slowdown in the US economy. Second, there appears to be a general anxiety about the state of the global economy based on the possibility of a regional war in the middle east sparked by an Iranian attack on Israel causing an oil shock, and the fact that interest rates remain at an elevated level despite the easing of inflation. Take those things together – fewer jobs means less market demand for products, and higher oil prices might mean higher costs for business – and you get the conditions for a sell-off of shares.
There’s another factor here too, which is that the US has just entered the final 100 days of its Presidential election, in which one campaign is transparently interested in talking up a recession and an economic crisis – only I can fix it – and the other is transparently interested in talking up the resiliency of the Biden-Harris economy. The nature of that dynamic is such that you will read many posts on social media from people who know nothing of economics telling you that the big recession is finally here, all thanks to that lot in the White House. All the conditions exist, in other words, for market overreaction. Trump himself was getting in on the act yesterday: “STOCK MARKETS ARE CRASHING, JOBS NUMBERS ARE TERRIBLE, WE ARE HEADING TO WORLD WAR lll, AND WE HAVE TWO OF THE MOST INCOMPETENT “LEADERS” IN HISTORY. THIS IS NOT GOOD!!!” he wrote on social media, a model of restraint and sobriety in the face of crisis as always.
Last week, I got in trouble with Trumpy readers for highlighting the systemic vulnerabilities of the US economy on the national debt, which is poised to become a full-blown crisis inside the next two decades.
In the short-term, however, the fundamentals of the US economy remain pretty strong: Deloitte’s Q2 forecast for the US economy for 2024 is worth reading in full, but the picture it paints is relatively rosy absent any downside shocks. Those shocks, it says, are threefold: The potential for a war (which is evidently spooking markets at the moment), monetary stresses related to higher interest rates (also happening to some degree) and third, the impact of import tariffs (championed by Trump but also to a lesser degree Biden) on the cost of purchasing for consumers.
Take those three together and look at them rationally, and the market reaction still seems a little excessive: While tensions are high in the middle east, it still seems remarkably unlikely that a full scale war would happen between Israel and Iran – a choreographed and repelled “reprisal” of some sort seems more likely. Interest rates, most people predict, will be lowered this month. And as for tariffs, while they are a fundamentally stupid policy, it is likely to be the middle of next year before a theoretical President Trump gets around to them.
The difference with the last major recession, in 2008, is that there does not at present appear to be a systemic problem with the financial system. These “shocks” are shocks within normal parameters, and appear to represent “risk hedging” far more than they represent market panic.
That said, it is self-evident that crisis sells, and that there are a great many actors – large and small – who are very invested in the notion of global crisis at the moment. That’s why you’ll find no shortage of tweets and social media posts predicting catastrophe.
Predicting catastrophe is, of course, a good industry to be in. First, because at some stage you will be correct, and second because if you are not correct you can simply attribute the avoidance of catastrophe to somebody temporarily papering over the cracks. Doom sells newspapers and garners twitter likes, while stability is boring.
For the moment, though, the panic in the markets analysis looks, to me at least, to be dramatically over-inflated.