On Wednesday, 17th May 2017, global equity markets took a nosedive. In particular, American equities posted their biggest drop since September 2016.
Washington in Chaos
Investors blame the chaos in Washington. The Dow Jones Industrial Average plunged by more than 370 points, whilst treasuries and volatility inched higher due to the pandemonium that is the Trump administration. As equity markets fall, bond markets rally as investors move into safe haven assets and, therefore, the rally in treasuries is as expected. Moreover, higher volatility implies that market uncertainty is growing, as investors are unsure of what to expect from the White House at this point. The following charts show how volatility and the Dow have reacted in the past few days.
Trump has been dealing with one crisis after another since he took office and it is no secret that he is presently dealing with political difficulties at home following the firing of former FBI director, James Comey. As concerns regarding his capability grow and the threat of impeachment rises, investors are getting more worried that these issues will delay promised growth initiatives such as tax reform, which the market, it seems, has priced in.
However, the fall in equity markets is not solely based on political uncertainty. The US economy has failed to maintain the momentum it gathered at the beginning of the year and this has, consequently, caused investors to take a moment to reflect on their expectations of the nation’s growth. A more reserved expectation of growth brings with it a cautious optimism regarding the profit potential of companies doing business in the US for the upcoming year.
Why Does It Matter?
Stocks have retreated from an important threshold. A few days prior to this plunge in the equity markets, US stocks were at a precipice, trying to move beyond the high they had reached on March 1st. Unfortunately, they failed to do so and have now fallen back rather drastically. These “retreats” and thresholds are important considerations for investors as sudden, unexpected downward movements in the markets can fuel an unnecessary short-term negative outlook.
Looking Ahead at Global Equity Markets
Stock markets rarely, if ever, move in a straight line.
Volatility in the stock market is expected. In fact, markets often briefly retreat before moving back up higher as investors quickly realise that there was no substance behind their concerns. Nevertheless, that does not mean that stocks do not face risks right now. For a start, given the dramatic upward climb in stock markets over the last year, many, if not most, investors are currently asking themselves “when will the rally end?”.
However, it is not all gloom and doom. There are many reasons to be optimistic about the markets as well. For instance, company profits are rising at a faster rate in comparison to previous years. So perhaps investors are reading too much into recent events. After all, one day of declines could just be the market acting as it naturally should on a day-to-basis.
Therefore, it will be crucial to see how the equity markets shape up over the coming few months in order to gauge the longer-term outlook for the US economy.