ODU Experts: Stock Market Volatility Not a Sign of Damaged Economy
The stock market has experienced days of volatile trading swings this week, prompting widespread concerns, but Old Dominion University economists say the economy is sound.
A relatively calm market was thrown into disarray early in the week when a mass sell-off sent trading into a free fall. The market dropped about 10 percent from a record high in January. Since then trading has fluctuated wildly and the Dow Jones industrial average finished down about 19 points on Wednesday - a slight decline after a rebound Tuesday.
Andrew Cohen, a finance lecturer who had a career in the New York Stock Exchange before coming to the University where he manages the Gregory A. Lumsden Trading Room and Research Lab; and Robert McNab, an economics professor and director of the Dragas Center for Economic Analysis and Policy in the Strome College of Business, said the market was due for a correction.
McNab said factors driving the rollercoaster included uncertainty in the federal government and a January jobs report that showed the U.S. added 200,000 jobs but wages increased 3 percent year over year. Wall Street took that as "bad news," he said, due to concerns the federal reserve could potentially act aggressively in raising interest rates.
While more "whipsawing back and forth" is likely in the market, McNab said the underlying fundamentals of the economy are still strong.
"Investors had become too complacent," Cohen said. "Valuations have become historically very high and the market was due for a correction."
Further, Cohen said the market did not actually "plunge" as was widely reported in the media.
"The public needs to understand volatility in terms of percentage moves not points," he said. "When they announce the Dow was down 1,175 points for the largest point decline ever it misleads the public."
The overall market benchmark is the S&P 500 which was down less than 5 percent Monday - not even in the top 20 all time down moves, Cohen said.
"This was a correction based on rising interest rates, fear of inflation and the fact that we had an overbought condition with very high valuations," he said. "There is nothing inherently wrong with the economy."