Regular readers know that I adhere to the axiom that nobody really knows what causes sudden, big moves in the stock market, short of war or another obvious shock. If one sticks to “greed” and “fear,” that’s about as accurate as it gets. Still, as I write, the Dow Jones Industrial Average is down more than 322 points.
1. The Federal Reserve has tried to send a reassuring message about the future of its exit from extraordinary measures to address the Great Recession and weak recovery. Slow and steady. But enough Wall Street players wonder if interest rates will go up sooner, not later. That might make asset classes other than equities more attractive and affect corporate profits. On the other hand, if the Fed removes its support too soon, it would increase deflationary pressures already out there.
2. Germany’s economy is slowing dramatically. That’s very bad news for a Europe still stuck in recession (thanks to Berlin’s insistence on austerity), as well as for the global economy.
3. The dollar is getting stronger thanks to its safe-haven status and the Treasury’s support of a strong dollar. The bad news: It hurts American exporters and causes companies to engage in complex hedging strategies to avoid getting slammed by the currency’s appreciation.
4. We’re at war again. Good news for some defense contractors. Bad news inasmuch as it brings uncertainty and blowback. And don’t forget opportunity costs: It can take half a million dollars in U.S. hardware to destroy a $30,000 ISIS pickup truck.
5. The air is thin up here. Just three years ago, the Dow was at 12,000. How much of this rally is backed by fundamentals, not only profits but a widely recovering economy? How much is risky speculation? Some investors don’t want to be the Greater Fool when the music stops.
6. China. The Chinese economy is slowing, the banking system is rickety and local debt especially is a problem. Then there’s instability in the west and (dwindling) protests in Hong Kong. Also, plenty of Chinese money is finding good returns in American real estate — the Waldorf-Astoria was just purchased for $2 billion — so less may be going to U.S. equities.
7. North Korea. Where’s Kim Jong Un? The pudgy murderous leader has not been seen in public in more than a month. Bad run of gout? Palace coup? When we’re dealing with a nuclear-armed crazy state, the answer matters.
8. Hack attacks. You may think I am overstating the importance of the breach at JPMorgan Chase, but, according to the New York Times, the attack raised alarms at the White House. This wasn’t Target or Home Depot, but one of the “systemically important” institutions of the financial system. Was it payback from Putin? Either nobody knows or nobody’s saying. But these large-scale affairs are worrying government and corporate officials.
9. Ebola. This isn’t a cable television HYSTERIA REPORT!!! But the unknown unknowns, as Rummy would say, in a highly interconnected world, should give sober people the willies.
10. It’s October, historic month of volatility. Stocks enjoyed a huge rally on Wednesday. All may be smooth sailing in November.
Thursday Reading: Why Americans are drowning in medical debt | The Atlantic
Today’s Econ Haiku:
There go your teachers
Roads, bridges, high-speed railways
Soon, boots on the ground