The party on the stock markets has ended abruptly. Rising interest rates and fears of economic downturn are worrying investors. The stock exchanges in New York are again closed in red today.
Are the stock markets moving forward a half-year ahead of the real economy, as an old stock market wisdom is? That would be a worrying sign, because the prices are falling sharply. Worldwide, the prices are now about 10 percent below the highest price this year.
The rapid rise in interest rates in the US is a major cause for the decline. The ten-year interest rate there now stands at 3.2 percent.
“That higher interest rate is a retreat,” says Han de Jong, chief economist at ABN Amro.
“The American economy is running at full speed, unemployment is at historically low levels and consumer confidence is at historically high levels. “The high growth creates demand for labor. The labor market is already tight, so more demand will lead to higher wages. That in turn causes higher inflation”, says De Jong.
Inflation in turn leads to interest rate increases. This has happened a few times and the Fed, the US central bank, has already announced that more will follow. Reason for President Donald Trump to wonder on Twitter whether the Fed has gone mad.
Trump is horrified by the coat of arms. As a result of the increases, the sky-high debts that the US has – more than 21.6 trillion dollars – will only become more expensive.
What’s more, they are driving the dollar’s price and dampening too much economic growth. “I have to be able to pay off our debts,” Trump said earlier this week.
Trump attacks Fed chairman Jerome Powell, whom he himself put forward in February. The Fed and Trump, incidentally, still have a major problem: the central banks also want to impose stricter capital requirements on banks, and that is the last thing that America’s first man is waiting for.
That Trumps statements have contributed to the worldwide stock market fall of the past few days is disputed by few. But it is not the whole story says Corné van Zeijl, fund manager at asset manager Actiam. He blames the decline on yet another cause.
It is clear that the economy is slowing down globally. China has great difficulty in maintaining growth. And Europe is bothered by that. Companies such as BMW and Mercedes have already indicated that their results are disappointing this year because they export less to China. That is a structural problem. It is one of the reasons that the economy in Europe is only growing slowly.
Growth is lagging behind due to the trade dispute between China and the US. The IMF also warned last week that economic growth worldwide is slowing due to the increasing uncertainty about this trade war. Such a conflict between the two largest economies in the world will also affect other countries. And the chance that the war gets out of hand seems to be bigger than getting smaller.
All this fuels the fear that the current economic boom will soon come to an end.
Nicholas de Krammer, а self-taught economic analytic with heave mathematical background. Math behind the economics (and economics behind math) is the strong side of the author. Contact him at firstname.lastname@example.org