After the Dow Jones industrial average fell 1,032 points, or more than 4 percent, on Thursday, local investment managers, analysts and economists sought to put the market turmoil in perspective.
Several talked about the apparent disconnect between falling stocks and a growing economy. They pointed to factors in the market’s decline ranging from rising interest rates, to the lofty valuations stocks had reached recently, to the role of rapid-fire computer trading.
And while they advised against overreacting, some admitted that it’s hard to say when the market’s zigzags will end.
A problem for Wall Street, not Main Street
Investors’ wild ride over the past week isn’t a sign that the U.S. economy is troubled, according to Anoop Rai, a finance professor at Hofstra University.
“The fundamentals are strong but investors are worried about inflation rising,” he said. “That’s understandable, but I’m confident the [Federal Reserve] won’t let inflation rise above 3 percent . . . The Fed will have a handle on it and raise interest rates, if necessary.”
The consumer price index, a key inflation indicator, rose 2.1 percent in December nationwide compared with a year earlier. In the metropolitan area, the index was up 1.6 percent in December, year over year.
Rai also said high-frequency traders, who buy and sell shares in tiny fractions of a second using computer algorithms, are probably behind some of the market volatility. “They dominate the market and they are amplifying uncertainty,” he said.
While Wall Street may be panicky, Rai said he doubts most consumers are. Wages are rising and that should encourage consumers to spend, which will help to offset any negative economic effects from the stock market, he said.
James T. Madore
A ‘perfect storm’
Fears of higher interest rates, rising inflation and overvalued stocks are combining to overpower the market, said Alan M. Newman, editor of Crosscurrents, a Wantagh-based stock market newsletter.
“It’s as if we have a perfect storm,” he said.
The decline in stocks follows what he called a stock market “mania,” in which the price of companies’ shares relative to their earnings — a traditional way of evaluating how expensive stocks are — got very high, and was “way out of whack.”
And the steep declines might not be over, if history is any guide, he said. He compared the current market to the overheated one that peaked in October 2007, two months before the last recession began. Stocks didn’t hit bottom until March, 2009, he said.
“I am not going to say that it’s going to go on for that long,” he said. “But that is the worst-case scenario.”
Not time to overreact
Ed Slott, a Rockville Centre-based financial and retirement adviser, said the 1,000-point market drop isn’t a time to “overreact” and that investors “really have to look at this long term.”
Individuals far from retirement “have the longest time horizon to grow” and “when the market goes down like this, it’s a buying opportunity while values are lower,” Slott said. “Closer to retirement, you want to have less exposure to stocks and more fixed income.”
Slott said that “this bull run started in 2009” and that prices couldn’t be expected to rise indefinitely.
A ‘flare gun’
“The current episode of volatility is almost like a small flare gun that’s going up in the air,” said Dwight Mathis, a market executive in the Melville office of New York-based Merrill Lynch Wealth Management.
The markets’ extreme zigs and zags signal investors’ concerns about inflation, policymakers’ comments about the valuation of stocks and real estate, and a new Federal Reserve chair, Mathis said.
Still, “This type of volatility is not abnormal historically. But we’ve been a bit immune from it in recent years,” he said.
Economic growth is still gathering momentum, and corporate profits are expected to grow by 16 percent in 2018, he said: “Nothing has materially changed in the last couple of weeks in our opinion.”
Tory N. Parrish
‘Coming off an extraordinary rally’
“The daily point decline of the Dow appears staggering but that is not uncharted territory,” said Michael Sceiford, a financial adviser in the Port Jefferson office of Edward Jones, a Des Peres, Mo.-based financial services firm.
“Over the short period of time, markets can frequently be led by leading headlines and emotions, but we expect economic conditions and the direction of corporate earnings to drive performance,” he said.
He recommends that clients not panic. Even with the decline in stocks, they are simply back to where they were a few months ago in 2017, Sceiford said.
“We’re coming off an extraordinary rally,” he said.
Tory N. Parrish