As the stock market appears to being bouncing back from its worst single day drop in years it is important to identify the reasons for the long overdue market pullback. The recent surge in the US economy along with the lowest unemployment rate in 17 years has many experts worrying about inflation. Let’s take a look at three other key factors contributing to this week’s wild ride in the stock market.
1. Sell-off Started from the Jobs Report. The labor department released their monthly jobs report last Friday on how many jobs were created in January 2018. 200,000 jobs were created with an increase in wages of 2.9% making it the biggest jump since 2009. How can that be a negative? Well on wall street they figure if you pay workers more than it has to lower profits.
2. New Chair of the Federal Reserve. Jerome H. Powell took over as leader of the federal reserve on Monday. Investors are uncertain if the new leader will follow in Janet L. Yellen’s of keeping interest rates low with extremely subtle increases. Nobody knows Powell’s strategy to keeping inflation in check. Will he mess it up?
3. Wall Street was Due to Come Back to Earth. On average the stock market gains somewhere around 8 percent a year. From January 2017 to January 2018 the stock market increased by 26 percent, almost 3 times more than the average. Investors knew stocks should not really be at these high of levels.
As alarming as the dip might seem it is not a true correction. A correction is when the market suffers a 10 percent drop from its peak. On Monday the market was about 8.5 percent lower than its January 26th peak. There have only been four official corrections since 2009 so people should not be predicting the worst just yet.
Consumers and companies are currently on the trend of spending money and it doesn’t seem to be slowing down in 2018. The stock market is not the economy though so don’t expect this downturn to be pointed at some bad economic news. Too much good news is the most likely cause of the dip.
The bottom line is that Wall street is mostly worried about inflation. When the costs of everything continues to rise and rise then people can lose faith in the value of money. In the most extreme example of too much inflation is the currency turns meaningless and the economy collapses.
Investors are not worried about the economy collapsing but with the latest taxes cuts and jobs report they fear the currency value could take a slight dip. The strong economy should offset the inflation scare and the stock market will recover and continue to rise. Just don’t expect the 26 percent increase of last year.