World rocked by US stock market turmoil

Wall over the place: The US stock exchange is based in Wall Street, New York City.

Is the economy heading for disaster? A slump in US shares has spread uncertainty around the world. It stopped short of a full-on crash, but experts are not sure what will come next…

This is the storm after the calm. Throughout 2017, stock markets climbed steadily. They were stable – eerily so, according to some. Now, suddenly, they are in turmoil.

After starting to drop last week, American stocks went into freefall on Monday. The Dow Jones, which keeps track of the stock market, saw its biggest one-day plunge in history. The world’s 500 richest people lost $114bn (£82bn).

This had a knock-on effect on Asian and European markets, which also fell. Yesterday, stocks recovered a little in the USA, but not so much in Europe.

Ironically, the sell-off of shares was apparently stoked by good economic news. On Friday, the US government revealed that wages are growing. Normally, rising wages lead people to spend more, which in turn causes prices to increase – the process known as inflation.

To prevent inflation from spiralling out of control, central banks; in the USA, the Federal Reserve (“the Fed”) increase interest rates. This makes borrowing more expensive, and investments in businesses less lucrative. Companies expand more slowly and stocks go down.

This cycle has not yet happened this time around (although some economists warn that it will). Rather, the mere prospect of higher interest rates triggered the sell-off. This led to a vicious circle: others cashed out because they saw the value of their shares fall.

There were probably other reasons behind the sell-off, not least the fact that the Fed has a new – and thus unpredictable – chairman.

This turmoil is awkward for Donald Trump, who regularly (and misleadingly) took credit for 2017’s stock market boom. Since the “Trump Bump” turned into a “Trump Slump”, the president has kept silent. The White House simply released a statement insisting that the economy remains “exceptionally strong”.

Indeed, the stock market is not the economy. Half of Americans don’t even own shares, and will be unaffected by the sell-off. But the market does reflect investors’ confidence in the economy, and a long-term slump can decrease people’s wealth, harming the economy in turn.

Should we be worried?

Taking stock

Have faith, say some. There have been far more dramatic slumps in history. This one only brought the market back down to its value at the start of the year. It was just an adjustment after a year of growth, triggered by good economic news, not bad. Things are already looking up since yesterday.

Don’t be so sure, reply others. We do not fully understand what causes market slumps; this one may have been triggered by deeper economic fears – about the effects of the Republican tax reforms, say. The market is still pretty crazy, and may well start plunging again. That could destroy wealth and trigger a recession.

You Decide

  1. Will you invest in the stock market when you are older?
  2. Is it important to be wealthy?

Activities

  1. Summarise this article in a tweet to Donald Trump.
  2. Investors tend to buy shares in companies they believe will grow in the future (see Q&A). Choose one company to invest in, and explain your choice in 500 words.

Some People Say...

“The main purpose of the stock market is to make fools of as many men as possible.”

Bernard Baruch

What do you think?

Q & A

What do we know?
Buying stocks, or shares, in a company gives you the right to a share of its profits. The company sells them to raise money for business ventures. The more profitable the company, the more valuable its shares. Some people invest in companies because they care about them and/or have faith that they will do well. Others simply buy shares in the hope of selling them on quickly at a higher price.
What do we not know?
What affects the stock market. The simple answer is that shares go down when supply outstrips demand, and up when vice versa. But determining what affects supply and demand is a matter of educated guesses. Good knowledge of the companies in question, and the economy in general, is crucial. Investors can pay financial analysts to do this homework for them.

Word Watch

Dow Jones
The US market has a handful of stock indexes. Each tracks the performance of stocks of a group of major companies, from which investors get an impression of the overall market.
500 richest people
Investor and businessman Warren Buffett, the world’s third-richest person, lost $5.1bn alone!
Wages are growing
The report revealed that wages are 2.9% higher than in January 2017 – the biggest increase since the Great Recession which began last decade.
Cashed out
Sold for cash.
Chairman
Jerome Powell was only sworn in on Monday afternoon. Given the chairman’s influence on the economy, a change in the role is often accompanied by a bit of market turmoil.
Took credit
Trump has tweeted about the stock market more than 60 times since his election. Presidents tend to avoid associating themselves with the market, not least because they know how unpredictable it can be.
More dramatic slumps
The Dow Jones saw its biggest fall in absolute terms on Monday, but at other times – such as last decade, or the Wall Street Crash of 1929 – the market fell a lot further as a percentage of its overall value.

Subjects

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