The Fall of the American Market

Analyst Natalia Milchakova on what is hidden in the collapse of the U.S. stock market, and how it could affect Russia.

The American stock market fell so far on Feb. 6 that the Dow Jones index fell 4.6 percent and the S&P 500 index fell 4.1 percent. Because of that, on Monday, Feb. 5, the richest people in the world lost $114 billion. Following the U.S. indices, the Tokyo Stock Exchange (the Nikkei 225), as well as indices in different Asian countries, fell into the negative, bringing with it Europe, including Russia. Is the world on the verge of a new financial crisis? I don’t think so.

The U.S. indices fell due to a number of factors. The most important of these is an obvious correction after years of growth. The Dow Jones has been steadily increasing since the fall of 2009. But in February of 2016 came an impression that the U.S. stock market simply forgot that stock prices can not only grow but decline as well. A correction was long overdue.

The reasons for this are frequently learned from either the news or from the financial statements of companies whose shares are publically traded. For example, the powerful and almost continuous growth of U.S. indices in 2017 could be attributed to the expectation of tax reform, which President Trump promised to make during his election campaign and then the passing of tax reform by Congress, which was ultimately signed by the president. Now Trump’s tax reform is no longer just words, and this news is no longer such a strong incentive for market growth, as it was last year.

Additionally, the recent change of power at the U.S. Federal Reserve System has a big influence on the stock market. If Janet Yellen was a supporter of tightening U.S. monetary policy, which meant transitioning from a period of low interest rates to gradually increasing them, then the new Federal Reserve Chair Jerome Powell is an even bigger “hawk” than Yellen was.

Earlier, Yellen promised that in 2018 the interest rate would be increased three times. But as soon as Powell took over her post, the financial markets increasingly started to talk about the fact that under the new leadership at the Fed, interest rates would increase faster than in previous years.

The growth of interest rates is bad for the market. It’s bad because the tightening of monetary policy will immediately begin to raise rates on bank deposits and debt securities. Therefore, against a backdrop of rate increases, bonds, and especially government bonds, become more attractive assets than stocks, due to the fact that the level of risk associated with government securities is always lower than the risk of securities of issuers.

On the last day of January, the Fed held a meeting on raising the interest rate, but the U.S. financial regulator has so far refused to raise it. Now the market is in a state of anxious expectation. When will this increase occur? This becomes an incentive to play the game of lowering stock prices.

Often, with strong falls in the American stock market, sad stories from the past are recalled, such as the bankruptcy of Lehman Brothers or Fannie Mae, which are now under state control. The collapse of these major American financial institutions is what caused the global economic crisis in 2008. But similar stories won’t happen again this year, as the global crisis is over, and the U.S. economy is on an unprecedented rise.

At U.S. stock exchanges, Wells Fargo shares fell 10 percent, which is rare in the market, and following these securities, the fall of markets has swept around the world. This correction is, unfortunately, not just an internal affair of the United States.

Against the backdrop of this fall, there’s a threat of the continued rise of oil prices and the strengthening of the ruble. A barrel of Brent (“sweet light” crude oil) could fall to $65.50 in the worst case, and the dollar against the backdrop of falling “black gold” prices could raise the exchange rate to 57.5-58 rubles.