By Elijah Lutz, Contributing Writter
In recent weeks, national media has been focusing on many different things. Among these stories is one that is causing Americans to be wary and nervous: the roller coaster that is the United States Stock Market.
The stock market recently fell, then rose, then fell again, then rose again! This volatile market has caused panic, confusion, and is frightfully reminiscent of the 2008 financial crisis that crippled our economy and left its impact on many Americans. But worry not, this is just a crazy fluctuation called a “market correction,” and there are a few factors to understand what is causing it.
At the risk of sounding like Donald Trump, the first reason for the market volatility is China. A few weeks ago, the government of China devalued their currency. While this did not directly influence the United States other than a stronger dollar, it did have a ripple effect in our markets. This devaluation hinted to American investors that China’s economic growth was slowing down. In an attempt to halt sluggish economic growth, Chinese officials devalued their currency, which, in effect, made their exports cheaper. Alas, this failed. China’s growth did, in fact, slow and caused the Chinese Stock Market to fall abruptly.
Now, how does this tie into the United States market? The Chinese have the second largest economy in the world. It is connected with almost all of American businesses on the market. After all, according to the English news magazine, The Economist, almost half of the world’s goods have a “Made in China” label. Since American companies are dependent on China, usually a fall in China’s stock market means a decline in our economy. And that is exactly what happened. American investors became worried and reacted spontaneously to their fall. On August 21, the Dow Jones Industrial Index fell 531 points, and on August 24, it fell over 1,000 points early but eventually rallied to make it a loss of 588 points at the closing bell. But this didn’t stay long, as the Dow again rallied back up within the following days. A week later, the Dow fell again. Not as much as it did on the days prior, but enough to scare investors. However, once more, the Dow is starting to rise. Investors, above all, are frightened by “variation” in financial markets, and the roller-coaster pattern exhibited in markets lately is variation with a capital V!
The second reason, albeit smaller, is the United States Federal Reserve. For the majority of the year, investors have been worried that the Federal Reserve, also called “the Fed,” will raise interest rates for the first time since the Great Recession in 2008. When the Fed raises interest rates, it is done in hopes of hitting their target inflation rate, two percent. A recent report showed that our economy has grown at 3.7 percent, and not the 2.8 percent that was initially predicted.
Because of this significant growth, it is very likely that the Fed will raise interest rates like they planned, which would make borrowing money more expensive for people and companies, thus tempering production and growth. Therefore, the good news of our economic growth rallying the US stock market may spark the end of this current long bull market.
In conclusion, there are many factors that contribute to market volatility, but in the long haul, it does not necessarily directly relate to any fundamental problems with the US economy. It does reflect, however, that we are a global economy—and a rock tossed into the economic waters of China will invariably ripple in the US. Chinese banks are working to correct for their losses, American investors are bouncing back from their worry-induced reactions and the market is rising back up and growing. This has left us, however, with a lesson to be learned: the economy is still a fragile thing that is tender in the hearts of Americans. We fear the recession from 2008, and because of such investors will react very cautiously to any unusual fall in our market. However hopes remain high for our economic growth, and with lessons from the recession still ripe in our minds, it will continue to grow.
