Drop of indices. Easy fright or serious fears?
Serious fluctuations on the world stock exchanges and fall of Dow Jones index are now being discussed even by grandmothers at home, being in fear that this is the beginning of a new financial crisis. But leading experts assure us that it is too early to panic and this is just a correction of the stock market.
What is the correction of the stock market?
This is a 10% decrease from the recent high. In this case, it's 26.616, which the Dow Jones reached about two weeks ago.
And although the decline of DJI on Monday was 1,175 points, and this was certainly the biggest ever drop rate (the Dow never lost more than 777 points in one day), in percentage terms, the decline on Monday was only 4.6%.
On the black Monday of 1987, the Dow Jones index fell by an incredible 22%. Today, this is the equivalent of a decrease of 5,300 points. And during the financial crisis of 2008, the Dow fell by 6-7% within a few days.
Why is this happening?
The most immediate reason is the fear of inflation.
Wages are rising, and unemployment is historically low, and that's great news for Main Street. But Wall Street fears that inflation will finally rise, and the Federal Reserve will have to raise interest rates faster to fight it.
Donald Trump called it a big mistake. "In the 'old days', when good news was reported, the stock market was rising. Today, when good news is reported, the stock market is going down. It’s a great mistake, and we have so many good (great) news about the economy! ", - he wrote in Tweeter.
Does this mean that we are entering a recession?
In the “old days,” when good news was reported, the Stock Market would go up. Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (great) news about the economy!— Donald J. Trump (@realDonaldTrump) 7 Feb 2018
The decline in the stock market does not cause a recession, production decline or a slowdown in economic growth. It can negatively affect the state of investors and confidence of consumers, but it is not a sign that the economy is in trouble.
Now in the USA unemployment is at a 17-year minimum. The average hourly wage rose last month most in just eight years. Consumer and business confidence is close to the record levels.
Economists say that it will take more than the fluctuations that we saw on the stock exchange at the beginning of the week to really worsen the US economic performance.