By Geoff Smith
It’s no secret that every economic player in the US and abroad was shaken to his and her financial core by the collapse in 2008. Well, after 10 years of relatively cautious stewarding by our business leaders, Federal Reserve governors and Federal regulators, our economy seems to have steered itself away from the shore and is heading back out to sea.
If you are an investor, this is thrilling. The Federal Reserve put extreme measures in place in 2008 to encourage banks to loan their money, and encourage small businesses and citizens to want to apply for loans. The Federal Government enacted more strict regulations governing several sectors of our economy. And businesses have been cautious while watching the global corners of the economy slowly and steadily put themselves back together. Aside from a couple yips, our stock market has steadily marched into record levels. Things have been steady and relatively quiet. And if you are a Wall Street investor, it’s probably been boring.
The underlying data that points to the health of our economy had been spotty with some sectors showing strength, while others showed weakness. But one-by-one, almost every measurement of our economic health has fallen in line. And those same things in the global economy have been doing the same. Today, all cylinders seem to be pumping in unison. Our economic ship is strong, the Fed will be removing the last of its recession-era policies and we will be headed out toward the deep waters.
In those deep waters, the sea is rougher and our economy will be more sensitive to disruptions at home and abroad. The Fed’s low interest rate policy has meant lower interest rates on loans, which has spurred people and businesses to borrower more and spend more. Typically, inflation, the measure of how much things cost and how much workers get paid, increases in this environment. But until recently it hadn’t. Many economists believe that low prices for goods and services being offered from global competitors have kept US businesses from raising their prices – which also has kept them from being able to raise workers’ wages. Economists had been concerned about inflation not moving up. But last month, the Consumer Price Index shot up past a projected 0.3%-increase and rose 0.5%. Now they are worried that inflation could quickly rise out of control.
Those concerns, coupled with a Fed announcement confirming several rate-increases this year, seemed to jolt the stock market. Investors had been riding a very long rise in the market. Many economists recently began to warn that stocks were getting over-priced. So when inflation, the last holdout data set, finally started to move, it seems investors started selling their positions.
To put it in more colorful terms, it seems as though our economic ship is heading away from the safety of the shore and out into the deep waters, and investors are tightening their portfolios to get ready for the voyage. Out in the deep waters, we’ll be less controlled by moves from the Federal Reserve, and more reactive to moves in the global market. That is unsettling to investors because where the Federal Reserve goes way out of its way to lay hints of future actions, the global economy is the wild west and there is a surprise around every corner. This concern could be the reason for the recent ‘correction’ in the stock market.
To put all of this into even more simpler terms, we are just now finally getting back to a normal, capitalist economy. Let’s all be good stewards of this ship this time, shall we?