February 6, 2018

The stock market is fine

Rush Limbaugh today said that the reason for the market volatility (yesterday the Dow Jones Industrial Average (DJIA) plunged over 1000 points) is a fear that they are trying to topple the Trump presidency.  I disagree.  While the Democrats may still be invested in ending the Trump presidency, the market is suffering a setback in that it has become, to a small extent, a victim of its own success.

The Trump presidency has seen a meteoric rise in the stock markets over the past year, and it's been accelerated by the passing of the Trump tax cuts.  When something changes so rapidly there is always a reverberation effect.  The stock market was due for a correction, but not a change of course.  True, the DJIA rise and the tax changes are likely going to have an inflationary effect, on wages, on interest rates as a result and then of course bond rates as a result of that.  That means money will shift towards the 10 year bonds (and others) with a better rate for those more interested in a secure long term investment.  That money has to come out of the stock market, therefore there's going to be a sell-off.  This is a temporary market correction, not a collapse.  Paul Krugman might try to convince his readers that the sky is falling like he did on election night in 2016.  It's not.

As the reverberation works it's way into the market, the buying will return, slowly at first but eventually once again apace.  The market cannot continue to rise at the rate it currently has been, corrections are necessary as is an eventual slowing of the torrid pace.  What is not necessary for investors is panic.
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