Okay, so it’s not the best way to end the summer. August is usually a dull month on Wall Street, but this year it’s an all-hands event as stocks plunge and investors brace for more. So far, the S&P 500 stock index (GSPC) has fallen by about 9% for the month and 8% for the year.
But that doesn’t mean end times are nigh or we’re facing another recession. A falling stock market usually damages consumer confidence, as investment accounts fall in value and scary headlines dominate the news. But the market doesn’t always reflect what’s happening in the real economy, and most ordinary people aren’t harmed by short-term declines in the stock market. Here are 5 reasons not to worry too much about the latest market gyrations:
This is nothing like the 2008 crash. The economic situation back then was awful, and the stock-market crash in the fall of 2008 would have kicked off a full-blown depression if not for aggressive government intervention. That’s not happening now. The nation’s biggest banks were at risk of failing in 2008; they’re in good shape today. Millions of homeowners had mortgages they couldn’t pay back in 2008, which marked the beginning of a foreclosure epidemic. But careful lending since then has left borrowers much more stable. Finally, many reforms have been implemented since 2008 to prevent meltdowns like that one. Wall Street often bellyaches about overregulation, but those reforms have made the banking system safer and far less prone to panic. Economists at Citi note that only 5 of 16 indicators on their “bear market checklist” are flashing red. Before the 2008 crash, 12 indicators were flashing red. “This suggests that a sustained bear market is unlikely,” the Citi economists conclude.
The U.S. economy is looking good. It’s not growing as rapidly as it did in the past, but it’s still growing. Employers have added nearly 1.5 million new jobs this year alone, and 11.6 million during the last 5 years. Consumers are spending more, the housing market is finally improving and auto sales are on pace for the strongest year ever. The risk of another recession is just 8%, according to Moody’s Analytics. And stock-market declines don’t usually prompt recessions; they merely reflect worries about the real economy.
Stocks are still up sharply over the last 6 years. The bull market rally began in March of 2009. The S&P 500 is still up 187% since then -- a huge rally. In that context, the 8% decline we’ve seen this year is a tiny squiggle on an otherwise upward line.
The Fed can step in if things get really bad. It’s possible that the current slump, which emanated from China, signals a global recession or something similarly ominous. If so, the Federal Reserve still has some tools it can deploy to contain the damage. As every investor knows, the Fed has been signaling that interest-rate hikes are coming soon. It could reverse itself and postpone the start of a tightening cycle. It could also resume quantitative easing, the super-easy monetary policy it halted last year. The Fed wants to cut back on stimulus rather than double down, but chair Janet Yellen is a dove likely to do whatever’s necessary if a recession seems likely.
Bargains will materialize. Wall Street traders are already hunting for stocks and other assets that have fallen by more than fundamentals may warrant and are likely to recover nicely. European and Japanese stocks may get snapped up first, because central banks in those regions are more likely to revert to aggressive stimulus measures than the Federal Reserve is. U.S. shares, considered more generously valued, could trail other markets for a while. It may not be time just yet to “buy the dip,” but that time always arrives. And you’ll never notice if you’re panicking.
Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.