Markets have been on a wild ride this week, with the Dow Jones Industrial Average plunging more than 300 points Thursday, after rising 275 points on Wednesday after falling 273 points on Tuesday. The return of volatility after months of relative calm doesn’t portend a U.S. recession, but investors can be forgiven if they’re confused about the direction of world economic policy. The biggest immediate worry concerns a downshift in global growth, especially in Europe. Even Germany is losing its mojo, and with the exceptions of Britain, Spain and Ireland, the Continent seems incapable of pro-growth reforms. Everyone is looking for the European Central Bank to save the day, but there’s only so much Mario Draghi can do. The other new variable has been the months-long rise of the dollar. Europe and Japan are using currency devaluation as a strategy to spur exports and growth, not that it is doing much good. Meanwhile, the U.S. economy is growing faster than most other developed economies, and the Federal Reserve is winding down its bond purchase program. The rise of the greenback was a sign of American economic vigor in the 1980s and 1990s. But the kind of rapid rise we’ve seen in recent months can also whipsaw investors and businesses that suddenly have to deal with exchange-rate risk. Commodities that trade in dollars are especially vulnerable to price swings, as falling oil prices show. American consumers are getting a break on gasoline and energy costs, but U.S. businesses will have to recalculate their earnings and investments. The uncertainty adds to investor volatility. Then there’s the wild card of the Fed, which may or may not start to raise rates in the first quarter of next year, or the second quarter, or the second half, or who knows when. Throw in the changing polls in the 10 or so races that will determine whether the anti-growth Harry Reid still controls the U.S. Senate next year, and maybe we should be surprised that markets aren’t more volatile.
Posted on: Sat, 11 Oct 2014 00:20:12 +0000
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