United States: 5 keys to understanding why the main Wall Street index suffered the biggest drop since 2011

United States: 5 keys to understanding why the main Wall Street index suffered the biggest drop since 2011


The New York Stock Exchange experienced a black Monday that made investors and brokers chill cold in the parquet floors.

The collapse in the quotations ignited all the alarms in the United States.

The Dow Jones Industrial Index ended the session at 24,345.75 points, 4.6% less than the previous day. The second consecutive day in red and the biggest percentage decline since 2011.

That year, widespread mistrust in the viability of the euro and fears about the delicate situation of public debt in Spain and Italy, in the middle of the collapse of the Greek economy, caused an August of sharp falls in the stock markets.

Much worse was what happened in 2008, with the financial crisis that originated in the United States due to the bankruptcy of the huge bank Lehman Brothers, unleashed a global economic earthquake that left millions of people without jobs in all parts of the world.

But experts predict that what happened on Monday on Wall Street is not so serious, but equally causes great concern.

To understand what happened, as always when talking about financial markets, there is no single cause to point out: here we collect five keys.

Two operators in the New York Stock Exchange.
Copyright of the GETTY IMAGES image
Image caption Analysts do not believe that a scenario like 2008 will occur.

1. The danger of inflation

The turbulence began on Friday, when the US Department of Labor published its employment figures.

The report included a much higher wage increase than expected.

That in the United States there is a situation of virtual full employment and the workers receiving higher wages might seem like good news.

But in economics things are almost never so simple.

Yogita Linaye, correspondent of the BBC, explained from New York that “if salaries go up, the forecast is that people will spend more, causing prices to rise”.

It is the danger of inflation, a key indicator to ensure a healthy economy.

Normally, the weapon that the central banks have to keep it at the desired level is the price of money, they are the interest rates.

Markets have long anticipated that the Federal Reserve (Fed, central bank) would raise them two or three times this year.

One dollar.
Copyright of the AFP image
Image caption Investors fear that Donald Trump’s policy will cause high inflation.

But, according to Ligaye, with the sharp rise in wages, “now they fear that I will do it several times more.”

It will be one of the challenges facing Jerome Powell, the new president of the Fed, which opens in the middle of the swell.

Powell will have to “make decisions that prop up growth but without alarming investors,” says Ligaye.

It will be the most difficult yet.

Several analysts have warned that the stimulus policy applied by the Trump government can lead to an “overheating” of the economy.

Some interpret the last days in the Stock Exchange as the confirmation of these fears.

2. Loss of confidence

It is still early to gauge whether the last two missteps are the foreshadowing of a major bump or just a passing bump.

“What is evident is that there are many people who have lost confidence, ” Lawrence Harris, a professor of finance at the University of Southern California, told BBC News.

When the stock market registers a fall it is the reflection that there is more supply than demand of assets. When there are more sellers than buyers, prices fall, as happened last Friday and Monday.

What could be related to some of Trump’s policies.

Donald Trump
Copyright of the GETTY IMAGES image
Image caption President Trump has approved restrictions on imports to favor US production.

“Many investors have realized that if the United States has a public deficit of one trillion US $, that has to be paid or at least financed,” says Harris.

The US president pushed for a tax reform that reduced taxes on corporations and many workers, but at the expense of decreasing public revenues and, consequently, enlarging the hole in the deficit.

According to the forecasts of the Budget Office of Congress, this would increase up to US $ 1.7 billion in 10 years for the reform.

That is one of the reasons why investors begin to be wary of the economy of the great power.

“Perhaps the euphoria that some felt at first with the tax reform was not justified,” says Harris.

3. The restrictions on free trade

Experience indicates that financial markets prefer an environment of deregulation and facilities for business.

The United States has historically been the great champion of international free trade. Already Woodrow Wilson, president between 1913 and 1921, flagged this.

The overnment of Donald Trump, by contrast, bet by a protectionist policyto promote American industry against foreign competition.

His government recently imposed heavy tariffs on the importation of washing machines and solar panels.

Screens in the New York Stock Exchange.
Copyright of the GETTY IMAGES image
Image caption The New York Stock Exchange accumulates 7 consecutive years of earnings.

“What is happening in recent days is probably related to the fact that the United States is becoming more and more anti-commercial, ” says Harris.

Markets do not like that “when trade is restricted, growth is restricted”.

4. Nothing can go up forever

Although government decisions have an impact on the behavior of the stock market, there are other variables. Some as simple and inexorable as the passage of time.

After the crisis of 2008, Wall Street accumulates seven consecutive years of bonanza.

And fat cows can not last forever.

“The market has been going up for too long and it feels like it has reached its limit,” says Harris.

In this time, “the markets have enjoyed unprecedented stability”.

“When people do not perceive risks, they are more willing to buy and now they will realize that things are more risky than they had thought.”

Thus, Harris believes that, in the short term, the price of shares will continue to fall.

In a scenario of less certainty, the large corporations and financial entities that operate in the market will have less appetite for taking risks.

“The strategies of recent years had been based on stability and now many are realizing that the market was not as stable as it seemed.”

5. How much to worry about?

What happened in recent days is not encouraging, but, according to Heather Long, a Washington Post commentator , “this is not the time to panic.”

The analysts do not contemplate for now a systemic collapse like the one that took place in 2008.

“What has happened can have an impact on investor confidence, but it ‘s hard to imagine a scenario like that, ” says Harris.

The importance of the decline in recent days is reduced if we take into account that the stock was at historic highs.

Copyright of the AFP image
Image caption Monday was the second consecutive day of reds in the Dow Jones.

“The value of the shares has fallen to the level it was in mid-December and at that time everyone agreed that it was very high.”

What, then, is what ordinary people should fear? “This will not affect them much in the short term.”

Even, says Harris expert, could be an opportunity.

“For all the people who have not saved enough for their retirement, it can be an opportunity to get hold of low-priced shares.”

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