Intraday Turbulence Won’t Affect a Stable Economy

February 6th, 2018

Upon opening Tuesday, the Dow sent waves of anxiety rippling across the country as it plunged 567 points, a drop significant enough to spark fears of recession worldwide. Tuesday’s turbulence brought even more concern considering Monday’s trade malaise, which entailed a 1,157-point fall and the worst twenty-four hours of point-loss in nearly seven years.

Tuesday’s fears were soon allayed, however, as the market laboriously rebounded into positive territory. By the closing bell, the Dow and S&P had made momentous gains, with the former swelling by 567 points and the latter boasting an impressive 1.7 percent climb, its largest since November 2016.

So what’s going on?

Although experts are able to extract a crazy number of trends from historical data, they seldom make predictions informed by intraday events. Trying to analyze the state of the economy based on a single day of market movement is like trying to watch a movie on a screen with only one pixel.

Instead, it’s best to consider stretches of weeks and months. Over the past 52 weeks, the Dow has risen 6,614 points in response to a demonstrably stable economy. As evidenced perennially, it can endure temporary shockwaves while growing without much of a hitch. On May 6, 2010, to name an example, the stock market lost over $1 trillion of capitalization in only 36 minutes, thanks to bottomming ETFs. But like this Tuesday, it bounced back with just a scratch and maintained a positive trend.

What happened this week was a flash crash. What that signals is facile to determine, but domestic concerns are hardly warranted, as the American economy continues to enjoy a prolonged period of growth. With President Trump’s Chicago-style policies weaning the country off Keynesian spending, corporations are beginning to signal confidence in the government’s ability to effect a fair economic milieu that treats consumers and corporations equally, as the law mandates. This differs from the Obama era, when corporations paused to accrue stockpiles of cash in suspicion of a burgeoning demand-side economy.

We might see a more permanent crash, however, if Congress and the President move forward with Trump’s besought trillion-dollar infrastructure plan. If the government distracts itself with more gluttonous deficit spending, as it did under Presidents Bush Jr. and Reagan, the final years of the 2010s could easily mirror the panics of their decadal predecessors. Trump could avert such a crisis by enforcing fair regulations that treat individuals and corporations equally while protecting consumers from risky corporate behavior and ensuring the government is never in a place to titillate banks with promises of bailouts. In that kind of atmosphere, the market would not be tempted to scheme, and the government would not be tempted to correct it.

If the administration is not so wise, the Dow will probably fall back into the same recessive pattern it has exhibited decennially for centuries. So it’s arguably in the President’s best interest to keep doing what he’s been doing for the past 18 months. If so, flash crashes like Tuesday’s will be nothing more than a blemish on a record of competent administration.