Since global crisis a decade ago, the stock market has been steady with low-interest rates that provided comfortable rides for the businesses and investors. However, the new age has come with the drastic drop in the trading market seen on February 5th, followed by the one on February 8th. On Monday of the same week, Standard & Poor’s 500 indexes fell by more than 4% that continued to be a 3.75% decline on the 8th. Such steep drop is more than 10% decline from its peak last month. Dow Jones industrial average dropped by 4.6% as well.
Such alarming incident did not stop within the territory of the United States. Friday, following the declining trend seen in the United States, Asian and European markets started to tremble. The trading rates in Japan, Hong Kong, Shanghai, and Taiwan fell by almost 4%, which led to some investors contemplating a brief pause in the business. Furthermore, it may be possible that European Central Bank, with its economy seeing a potential to grow, backtracks.
All these changes in interest rates and stock points can be an indication of the stock market entering the correction territory – declining trend is not a mere consequence of a few individual falling share prices. While it is absurd to identify exact causes of the current status, it is anticipated to be the anxiety that the central bank will increase the interest rates for the desire of avoiding inflation and ensuring that the fast growth of the economy does not cause damage in the future.
President of Federal Reserve Bank of Dallas, Robert Kaplan’s positive comment on the employment indicators, saying that “the unemployment rate will fall below 4% within this year”, is being interpreted to lead an increase in benchmark interest rate. Such interpretation of his comment led the market rate to escalate quickly. Not only this but also the statement from BOE (Bank of England) stirred the investors. Mark Carney, governor of BOE, stated that he plans to “tighten the monetary policy” to “return inflation sustainably” to its target and over a “conventional horizon”, which implies that England may join the trend of increasing the benchmark rates along with the United States.
While there are many assumptions and estimations being inferred, it is clear that every country, along with every investor, must be aware of the future crisis that may be on his or her path.
By JENNIFER KWON
Tax Advisors for Champaign Society