By Karla Kim
This week, Wall Street watched a 6-day consecutive decline in the stock market with Standard & Poor’s 500 stock index down almost 7 percent from its September peak. Wednesday suffered its worst fall in 8 months with a 3.3 percent drop. A multitude of factors are fueling this sudden decrease with Trump characterizing this as “a correction that we’ve been waiting on for a long time.” Growing concerns over Trump’s trade war, overvaluation of businesses (particularly those in the tech space), rising interest rates from the Federal Reserve, and potential inflation are all causing investors to react negatively to the market.
With Trump’s trade war intensifying as billions of dollars of Chinese goods meet strict tariffs, many American companies, especially tech companies, are facing potential disruptions in since they rely heavily on Chinese manufacturers for their product parts. For example, Apple’s challenges with increased production cost contributed to their 4.5 percent share drop on Wednesday, which demonstrates the ramifications of the trade war on the stock market. Furthermore, the valuation of tech companies has been stretched as Wall Street continued investing in the hopes that the strong earnings and growth seen this year will continue. However, much of those earnings are attributed to the 2017 tax cuts, and so investors are expecting growth in the upcoming year to slow down considerably.
Besides market performance corrections, there is also a level of anxiety surrounding the Federal Reserve’s contractionary monetary policy as increased interest rates are projected to be in the 2 to 2.25 percent range. This is triggered by the strong economic growth under Trump’s administration. The U.S. economy has been experiencing its highest growth in 4 years with a 4.1% annual growth rate coupled with a multi-decade low rate of unemployment. However, rapid economic expansion and tightened labor supply also means increased inflation. Thus, despite Trump’s outspoken opposition and directed blame for the stock market drop, the Federal Reserve plans to continue raising the interest rate for the fourth time this year in December, causing investors to raise the alarm as borrowing money becomes more expensive.
And yet, despite all these mounting worries, it is important to keep a holistic perspective on the U.S. economy. Even with this week’s stock market drop, stocks still rose 2 percent this year overall. The market regularly fluctuates with deviations as substantive as 10 percent from their peak in past years. What will be more important to consider moving forward is the level of uncertainty investors are willing to tolerate, and how that will translate to long term effects on our increasingly mercurial economy.