Quick Look:
- Black Monday Prediction: Predicted a 20% market drop repeatedly until it happened on 19 October 1987.
- Modern Economic Fears: Trump’s alarming statements contrast with a still-growing US economy.
- Federal Reserve’s Actions: Jerome Powell should signal future rate cuts rather than immediate emergency measures.
- Geopolitical Tensions: The Middle East conflicts impact market sentiments; Biden could adopt firmer policies.
I issued a public warning two weeks before the infamous Black Monday on 19 October 1987: “In two weeks, the stock market will lose 20% of its value.” True to the prediction, the S&P 500 experienced the most significant one-day decline in its history, plummeting by 20%. The aftermath was immediate. This tale is a testament to the idea that steadfast economic predictions will eventually hit the mark if one holds firm long enough.
The Drama Unfolds: Modern Echoes of Economic Fears
Fast forward to present times, and the echoes of economic fearmongering are still reverberating. On Monday, Donald Trump declared, “Stock markets are crashing, jobs numbers are terrible, we are heading to world war three, and we have two of the most incompetent ‘leaders’ in history.” Despite these ominous proclamations, the reality is less dire. The United States is not on the brink of a recession; the economy continues to grow, and there is no immediate cause for alarm. Trump’s commentary seems more like an attempt to incite panic, perhaps as a strategy to undermine Kamala Harris since other tactics have failed.
The Fed’s Role: Rates and Reactions
The Federal Reserve’s actions are pivotal in this narrative. Jerome Powell, appointed by Trump in 2018, should have initiated interest rate cuts at the last Fed meeting rather than delaying until September. The current prime rate of 5.3% is excessively high, and the Fed’s 2% inflation target is unrealistically low. However, an emergency rate cut isn’t necessary at this juncture. Such a move could signal that the Fed is worried about a recession, potentially triggering the panic they aim to avoid. Instead, Powell should communicate a likely half-percentage-point rate cut at the upcoming September meeting to manage expectations and market reactions effectively.
Geopolitical Tensions: The Middle East Influence
Beyond domestic economic policies, global geopolitical tensions also sway market sentiments. The ongoing strife in the Middle East, particularly with Benjamin Netanyahu’s aggressive stance, adds to the uncertainty. There is room for Joe Biden to take a firmer stance in restraining Netanyahu for humanitarian and economic reasons. Reducing the shipment of offensive weapons could help de-escalate the situation, potentially stabilizing the markets.
Lessons from History: The Resilience of the Market
Reflecting on history provides valuable lessons. The crash of 19 October 1987 was a temporary setback. The Federal Reserve responded by injecting liquidity into the banks, ensuring brokers did not default. Remarkably, within two years, the market had recovered all its losses, and the economy remained robust. This historical resilience is a reminder that short-term market fluctuations do not necessarily indicate long-term economic health.
The Real Economy: Beyond Stock Market Fluctuations
Recognizing that the stock market is not a true reflection of the economy is crucial. The wealthiest 10% of Americans hold over 90% of all stock owned by individuals, with the top 1% owning just over half. The actual economy, however, is driven by the spending power of average working people. Their consumption directly influences business hiring and economic growth. Unfortunately, high interest rates have disproportionately impacted lower-income individuals, raising costs on credit cards, car loans, mortgages, and rents. Addressing these issues is vital for fostering a healthy, inclusive economy that benefits all, not just the wealthy few.
In conclusion, while dire predictions and economic fears make for sensational headlines, the financial landscape often tells a more nuanced story. Historical resilience, prudent policy adjustments, and addressing the real needs of everyday people are essential for navigating economic challenges. The lessons from Black Monday and the current economic discourse remind us to look beyond the noise and focus on long-term stability and growth.
