Nobody knows why stocks are tanking

So far, so typical. This is the classic kind of good-news-is-bad-news story that you see all the time — or at least you used to. And that's the second point. Ever since the 2008 crisis, investors have grown accustomed to a world where inflation has stayed low, interest rates have, too, and nothing has been able to change that. They haven't had to concern themselves with things like higher wages leading to higher inflation, and so, after a while, they didn't. As the Wall Street Journal's James Mackintosh points out, bets that increase would either be far above or far below the Fed's 2 percent target hit an eight-year low last December.
Nobody knows why stocks are tanking

But maybe the best way to tell how complacent people had gotten was how many of them were willing to buy securities that were only worth anything as long as nothing wrong happened. In other words, they were betting that stock market volatility would remain at historic lows. Now, that might not sound that crazy, but consider this: Even the banks that were selling these investments, the Wall Street Journal's Charles Forelle notes, were warning people that they'd “likely lose all or a substantial portion” of their money over the “long-term.” And yet plenty of people wanted them. They thought upside risks were a thing of the past and downside risks were something the Fed would take care of.
The fact that markets were so unprepared for an inflation scare helps explain why they're freaking out about it so much now — but only helps. The truth is that we don't know why stocks are selling off so much. Sure, they started dropping last Friday because interest rates were rising — that was the fear of higher wages — but since then they've continued to do so even as interest rates have, too. It's not just that there's no coherent story there. It's that there's none at all. It's reduced people to saying that maybe this is about automated traders selling in response to all this volatility, or valuations just coming back down to earth after they got ahead of themselves at the start of the year. And maybe it is! But these are just sophisticated ways of saying you don't know. Which is part of this? People seem to be panicking because they don't understand why they're panicking.
Now, at some point, prices will have fallen enough for people to realize that the economy is still doing well, businesses are still hiring, and consumers are still spending. Good news will eventually be good news again.

Nobody knows why stocks are tanking Nobody knows why stocks are tanking Reviewed by full information on February 09, 2018 Rating: 5

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