A trader works on the floor of the NYSE at the start of trading Wednesday. After plunging more than 450 points, the Dow ended down 173.45 (Justin Lane / European Pressphoto Agency)
On October 16, 2014,Don Lee, Andrea Chang and Dean Starkman write in the Los Angeles Times:
First it was fresh concerns about the fragile Eurozone recovery. Then there was the sudden steep fall in oil prices. Now investors are worrying whether the American economy can pull up a slumping global economy.
And overlaying all these — fears about the spread of the deadly Ebola virus.
A weak monthly U.S. retail sales report magnified the angst Wednesday in European financial markets, setting off wild swings on Wall Street and fueling speculation that the Federal Reserve could delay its first interest rate hike or even reverse plans to end its bond-buying stimulus program this month.
After plunging more than 450 points in midday trading, the Dow Jones industrial average ended down 173.45, or nearly 1.1%, at 16,141.74.
It was the Dow’s fifth straight day of losses as investors dumped stocks and raced toward the safety of government bonds. The broader Standard & Poor’s 500 stock index fell 0.8%. The blue-chip index has fallen in 10 of the last 12 days, wiping out its gains year to date.
“When people buy, they buy hesitantly, versus when people sell…. They sell with abandon,” said Carter Braxton Worth, chief market analyst at brokerage Sterne Agee in New York, describing the mood on his company’s trading floor as “charged.”
Most analysts, however, aren’t worried — not yet. The Dow is still up more than 6% from a year ago and the S&P even more. Stocks appeared to be overdue for a correction — a 10% drop — especially after months of increases amid unusually calm waters.
Meanwhile, analysts noted, the outlook for the U.S., European and global economies has changed little in recent weeks. The Eurozone’s stagnant economy looks a bit worse off than before, with Germany’s engines weaker than expected, but no one was counting on a rapid recovery in the 18-nation single-currency market.
Crude oil prices have tumbled, but there are upsides to that for some nations and businesses, as well as for consumers who are seeing prices at the gasoline pumps fall.
As for the U.S. economy, the 0.3% drop in retail sales in September from the previous month, while disappointing, came on the heels of very strong auto sales over the summer.
What’s more, with job gains running faster this year, most forecasts see the American economy growing at a healthy pace of about 3% in the second half of this year and through next year.
“It’s a temporary phenomenon,” Sara Johnson, senior research director of global economics at consulting firm IHS Inc., said of the turmoil in financial markets. “Certainly the outlook for business profitability would not warrant a sharp pullback as we’ve seen in the past few weeks.”
Diane Swonk, chief economist at Mesirow Financial in Chicago, thinks stock prices got ahead of fundamentals earlier and now they’re overshooting on the downside.
“The reality is that markets are overreacting right now,” she said, noting that Wednesday’s sell-off in Europe, where all the major indexes except the London FTSE 100 fell 2% to 3.6%, was magnified by unsupported headlines that the U.S. retail sales report was signaling a sudden retreat by American consumers.
If the stock market swoon persists in the days ahead, Swonk and other economists worry that it could undermine confidence and hurt spending and investment. It doesn’t help that there are increasing concerns about Ebola and the ability of health authorities to halt the spread of the virus in the U.S.
Geopolitical tensions in Ukraine and the battle against Islamic militants have added to anxieties. “It’s an environment that’s just paralyzing the bulls,” said John Lonski, chief capital markets economist for Moody’s Analytics.
In addition, October historically has been very tough for stock markets.
“It’s Halloween in the United States and we all get scared,” Swonk said, only half jokingly. She pointed out that the 85th anniversary of the 1929 crash will come Oct. 29.
That also happens to be the day when the Fed will hold its next policy meeting. Further volatility in capital markets — stocks, oil prices and bond yields — could present a major challenge as financial stability is a key goal of the central bank.
Fed policymakers have relied on two extraordinary measures — monthly bond purchases and low benchmark Fed rates — to spur the economic recovery from the Great Recession.
They previously indicated that they would end their bond-buying program this month, but some market players suspect that could now be put off, or even that a new round of bond purchases could be launched. And the markets have revised their bets that the first interest rate hike will come next June to December next year.
“It does put the Fed in a sticky situation because financial stability is the third pillar that they have to deal with,” Swonk said of the Fed’s primary objectives, which also include maximizing employment and controlling inflation.
For now, Swonk and most other analysts expect the Fed to end the bond purchases this month.
Moreover, unless the picture of U.S. growth deteriorates noticeably, “there is a strong likelihood that these latest market moves will be reversed sooner rather than later,” said Paul Ashworth of Capital Economics, “and that the Fed will still begin to hike rates sometime in the first half of next year.”
The prospect of a rate increase has added to jitters about a global economy that has few bright spots outside of the U.S.
Besides the Eurozone, China’s economic growth as well as that of emerging economies in general is slowing. That explains part of the recent plunge in oil and some other commodity prices, which in turn has added to concerns about the possibility of falling prices, or deflation, in the Eurozone.
Analysts said the outlook in Europe could improve if Germany, the continent’s largest economy, were to increase domestic investment and spending, as it is under growing pressure to do.
Mark Zandi, chief economist at Moody’s Analytics, hasn’t changed his outlook but has raised his calculation of risks for the economy.
What struck him about the latest turmoil in markets wasn’t the fall in stocks and oil prices, but bond rates. On Wednesday, the yield on the 10-year Treasury, a benchmark for mortgage rates, fell momentarily to less than 2%. It closed at 2.14%, down 0.056 point, the lowest in more than a year.
“Two percent is really shocking for an economy growing at 3% experiencing robust job growth,” Zandi said.
The drop, from 2.62% less than a month ago, already has triggered a bump in mortgage refinancings. But although that may be good for now, the fact that the yield has fallen that low could be a harbinger of trouble if it stays there for more than a month or so.
“It’s a barometer of fear,” he said, noting that if it were to last, the jolt to confidence could affect consumer spending and hiring by businesses. “And that’s a whole different ballgame.”
In the up and down world of the casino stock market, there is not always the reality of company values set by the market. Instead speculation is the rule. The Federal Reserve uses the stock market indicators as a measure of financial stability, and aims at achieving the Fed’s other primary objectives of maximizing employment and controlling inflation.
As a result of the dismal and alarming sudden swings on Wall Street, the Federal Reserve is attempting, with comments, to rescue the casino stock market. What we really need is a reform of the Federal Reserve if we are to turn our nation around and put us on a path to prosperity, opportunity, and economic justice for EVERY citizen.
In the United States, we need to lift ownership-concentrating Federal Reserve System credit barriers and other institutional barriers that have historically separated owners from non-owners and link tax and monetary reforms to the goal of expanded capital ownership. This can be done under the existing legal powers of each of the 12 Federal Reserve regional banks, and will not add to the already unsustainable debt of the Federal Government or raise taxes on ordinary taxpayers. We need to free the system of dependency on Wall Street or the accumulated savings and money power of the rich and super-rich who control Wall Street. The Federal Reserve System has stifled the growth of America’s productive capacity through its monetary policy by monetizing public-sector growth and mounting Federal deficits and “Wall Street” bailouts; by favoring speculation over investment; by shortchanging the capital credit needs of entrepreneurs, inventors, farmers, and workers; by increasing the dependency of with usurious consumer credit; and by perpetuating unjust capital credit and ownership barriers between rich Americans and those without savings. The Federal Reserve Bank should be used to provide interest-free capital credit (including only transaction and risk premiums) and monetize each capital formation transaction, determined by the same expertise that determines it today––management and banks––that each transaction is viably feasible so that there is virtually no risk in the Federal Reserve. The first layer of risk should be taken by the commercial credit insurers, backed by a new government corporation, the Capital Diffusion Reinsurance Corporation, through which the loans could be guaranteed. This entity would fulfill the government’s responsibility for the health and prosperity of the American economy.
The Federal Reserve Board is already empowered under Section 13 of the Federal Reserve Act to reform monetary policy to discourage non-productive uses of credit, to encourage accelerated rates of private sector growth, and to promote widespread individual access to productive credit as a fundamental right of citizenship. The Federal Reserve Board needs to re-activate its discount mechanism to encourage private sector growth linked to expanded capital ownership opportunities for all Americans.
We need to reform the Federal Reserve Bank to create new owners of future productive capital investment in businesses simultaneously with the growth of the economy.
The solution to broadening private, individual ownership of America’s future capital wealth requires that the Federal Reserve stop monetizing unproductive debt, including bailouts of banks “too big to fail” and Wall Street derivatives speculators, and begin creating an asset-backed currency that could enable every man, woman and child to establish a Capital Homestead Account or “CHA” (a super-IRA or asset tax-shelter for citizens) at their local bank to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. Policies need to insert American citizens into the low or no-interest investment money loop to enable non- and undercapitalized Americans, including the working class and poor, to build wealth and become “customers with money.” The proposed Capital Homestead Act would produce this result.
http://www.latimes.com/business/la-fi-world-economy-stocks-20141016-story.html#page=1
