Column: Investors Should Consider Bigger Picture of Stock Market Drop
After months of historic growth and big gains in the stock market, brokers and day traders were faced on Friday with an aggressive sell-off that caused a sharp decline in the Dow Jones Industrial Average and S&P 500 and marked the largest drop in a single day since the day after the Brexit vote in 2016.
So … this is the beginning of the end, right? The start of the next recession? The time to invest in gold and bury it in the back yard?
Probably not, but that doesn’t stop panic from arising in hedge funds and big investors. After seeing such a buy-heavy season in stock, it can be scary to see such a dramatic drop — especially when the DJIA dropped exactly 666 points (yikes) — but all it really means is that people need to start looking at realistic causes and effects of the long-anticipated stock plummets, not superstitions.
Let’s start off by noting that this drop is likely the effect of something good. There seems to be a general consensus among economists that the drop is the cause of wage growth. The Labor Department’s job report that was released on Friday found that wages rose 2.8 percent in the final three months of 2017 — the fastest growth since the 2008 recession.
Smart investors realize that higher wages translate to a risk of higher inflation, and even the slightest whiff of inflation — which has been largely subdued despite the Federal Reserve’s efforts to raise it — scares away investors. Not to mention that in the short-term, higher wages means less money for companies.
Still, it is hard to say that higher wages are a bad thing because they negatively affect the stock market. Take into consideration that the richest 20 percent of Americans own 92 percent of the stock market — data calculated by renowned New York University economist Edward Wolff — and it becomes increasingly clear that the drop is actually a win for middle-class and low-income families whose livelihoods rely on hourly wages and not on the current share value of Apple.
If anyone reading this is an actual owner of Apple or any other blue-chip stock, though, then I would argue your concern about the drop itself could affect the market. Stock owners and institutional investors commonly demand immediate and high gains in value from the companies they invest in, forcing companies into a short-term mindset where CEOs are focused on raising profit in the next quarter instead of in the next 10 years.
This “short-termism” that is especially prevalent in Fortune 500 companies helps drive volatility in the marketplace. If there is even a slight drop in profit in a company’s next quarter, its stock will take a nosedive. Investors need to look to the long-term and demand long-term economic stability from their companies. If this were the case, the “plummet” we saw on Friday might have been only been a small dip.
It is important to also look to the political repercussions from the sudden drop in the market. Being that President Donald Trump has been heralding the rise in stock and wage growth as the result from his presidency, it will be interesting to see what he says — or doesn’t say — about the drop.
Fans and critics of Trump alike, though, should be hesitant to attribute too much of the blame or praise of the stock market’s performance to him, or any president for that matter. There are millions of moving parts that affect the overall performance of the stock market; stating that the president has a big hand into how it performs is not looking at the big picture.
Regardless, some voters will look at the stock market as a sign that the U.S. economy is either healthy or in shambles, and politicians from both sides will look to spin the stock market’s performance this coming year to make their respective party look good.
The fact that economic and political sects place so much weight into the stock market — that we use it not simply a “market” but as a main indicator for the overall strength of the U.S. economy — ensures that we will always overestimate the consequences of its movements.
But even if the big banks and institutional investors wake up tomorrow morning to find out they lost another million dollars, life goes on. The world is not run by Wall Street, and God is still good. Let’s take refuge in that if nothing else.