U.S. stocks: 10 days, 4 days, the fuse bubble burst
If the epidemic is not under control, a recession in the U.S. economy will be a high probability event
■ Xu Mingqi
On March 18, the U.S. stock market plummeted again, triggering the fourth time this month and the fifth time in history. As of March 18, compared with the high of February 19, the Dow Jones Industrial Average fell nearly 10,000 points, or 34%, and the Nasdaq fell 2828 points, or 28.8%, compared to the S & P 500. It fell by 988 points, or 29.2%. The US stock market has basically returned to the level of early 2019. In just 10 days, four fuses occurred in the US stock market, which again proved that the bubble will eventually burst.
Fed saves the market frantically, why not buy US stocks
With the global spread of the new crown pneumonia epidemic, market worries continue to increase, coupled with the slow movement of the United States government in fighting the epidemic, which makes people even more pessimistic. As a market reaction to future concerns, U.S. stocks have been falling since mid-February. In order to alleviate market worries and respond to Trump ’s request for interest rate cuts, the Fed did not wait for a meeting of the Open Market Committee from March 17 to 18, and hurriedly announced on March 3 that it would cut the federal benchmark interest rate by 0.5%.
However, this measure did not soothe market sentiment. When the US stock market opened on March 9, the S & P 500 index plummeted 7%, triggering the first meltdown of the month. Since then, U.S. stocks have triggered circuit breakers on the 12th, 16th and 18th, respectively.
The stock market is the most sensitive barometer of market confidence and has been greatly affected by expectations. The spread of the new crown pneumonia epidemic has led to rising concerns among the American public and will inevitably be reflected in the stock market. However, this stock disaster is not the same as the financial crisis caused by bad debts and non-performing assets. It is not a market contraction caused by a lack of liquidity, but a panic contraction caused by the impact of real economic activities (consumption and production) on the epidemic. The hedging effect of monetary policy is limited.
This is why the Fed's previous significant reduction in interest rates and the implementation of quantitative easing usually led to a rise in commodity prices and stock prices, but this time, it failed to prevent the plunge in international crude oil prices and US stocks. As the epidemic continues to spread, its adverse effects on consumption and production and physical activities are certain. In this context, the volatility of the stock market will fluctuate sharply with the spread of some information, and monetary policy will be nearly ineffective.
In addition to the panic caused by the market panic, the severe bubble in the US stock market itself is another important factor. After recovering from the worst post-war recession triggered by the financial crisis, the US economy recovered in 2010, and US stocks also rose all the way, hitting record highs. Later, as Trump ’s large-scale tax cuts gradually weakened the economic stimulus effect, the US economic growth rate in 2019 dropped significantly, and US stocks began to consolidate. However, under the pressure of Trump, the Fed began to cut interest rates in 2019 to protect the stock market from continuing to rise. Stimulated by loose monetary policy, the US economy has not strengthened as Trump hoped, but the stock market has risen all the way, hitting an all-time high in mid-February this year, and generally rose by more than 30% in one year. The average price-earnings ratio of the US stock market is more than 30 times, and the bubble is obvious. Of course, if there is no outbreak of new crown pneumonia, the bursting of the US stock market bubble may also be displayed in other ways, just like the 2008 financial crisis caused by the subprime mortgage crisis.
Epidemic hits consumption, economic "engine" goes out
No matter what causes the stock market to fall sharply, there will be speculative shorting factors behind it. When the stock market is concentratedly sold by one-way expectations and sentiment in a certain period of time, short speculative operations can obtain considerable profits, which causes the price to fall. This is why some countries have suspended the short-selling mechanism in the stock market disaster caused by the outbreak. Therefore, in addition to the central bank providing liquidity and stimulating the economy through fiscal expansion policies, it is also necessary to strengthen the control of speculation in special periods.
At present, the Federal Reserve ’s monetary policy continues to be loose, and there is limited room for it. Although it is theoretically possible to implement negative interest rates like the European Central Bank and the Bank of Japan, this will seriously damage the credibility of the Federal Reserve and the dollar ’s international currency status. Moreover, the experience of Europe and Japan has shown that the effects of negative interest rates on economic and financial markets are limited. At present, the relatively effective response to the new crown pneumonia epidemic may be fiscal policy. The Trump administration is currently brewing a $ 1 trillion economic stimulus package that, if implemented, could delay the U.S. economy's recession.
However, the negative impact of the new crown pneumonia epidemic on the US economy is difficult to offset by these policies. The United States is a consumption-driven economy. In 2019, the pull rate of private consumption on GDP was 1.76 percentage points, and its contribution to economic growth was as high as 75%. The epidemic has led to a decrease in the number of people going out, consumption from various travel, entertainment, catering and business activities will shrink, and economic losses will be very severe. In the final analysis, to get out of the current difficulties of the US economy depends on the effective control of the epidemic. If the Trump administration's response to the epidemic is still slow or inadequate, it will be a high probability event that the U.S. economy will fall into the quagmire of recession.
(The author is a specially-appointed researcher of Shanghai Institute of International Finance and Economics and vice chairman of Shanghai International Economic Exchange Center)