Lee Bernstein, Faith Pinho, and Benjamin Schaeffer
Everywhere one turns there is more information and updates about the state of the economy. President Trump regularly comments on the Dow’s performance; yet this week the White House was assuredly disappointed in its underperformance - “DOW slides as US stock Market Suffers Worst Week in Two Years”. This past week, the Dow Jones Industrial Average, the most recognized stock market index, negatively affected other global indices, but why?
On February 2nd, the Bureau of Labor Statistics released an upbeat jobs report for the month of January. Over 200,000 jobs were added - although unemployment remained unchanged at 4.1%. While these numbers sound great to the layman, the markets did not expect such a promising report amid fears of increases in central bank interest rates. The United Kingdom’s FTSE 100 and Japan’s NIKKEI 225 plunged with the DOW. There is no surprise that if one market does poorly, especially unexpectedly, that the others will respond negatively, but for the average person it seems counterintuitive that an increase in labor participation would be a negative for Wall Street.
The problem lies with countries’ central banks. When the economy is doing well, the Fed or its counterparts around the world (like the Bank of England and the Bank of Japan) begin to increase increase rates, so that the economy does not grow too quickly. Just last week, the Bank of England hinted at raising its interest rates earlier than expected. In a recently published article, the BoE chief stated that interest rates increases would not be as high as reports suggested at the end of the last week.
It is no shock that the world has become increasingly more interconnected in this century, and the stock market is no exception. In attempts to diversify stock portfolios, there has been an increase in the purchasing on international stocks, further entangling the economies of countries around the world. Due to the strength of the U.S. market many countries display great interest in what the DOW does because of interconnectedness between markets.
As the graphics below show, interest in the indicies, as measured through Google searches about them, saw a great uptick. We looked at Google search trends in the United States, Japan, and the United Kingdom. Both Japanese and British Google searches showed higher interest in their respective stock indices but also a fair amount of interest in the Dow Jones. On the other hand, Americans were only searching about the Dow Jones' performance.
The variation in the stock market this past week shows how sensitive the international markets are to slight fluctuations in domestic economies. The week began with a slew of news articles and updates about the Dow Jones’ severe downturn, with The Guardian citing it as the “worst week in two years.” As a previous post on this blog explained, the Dow Jones was responding to an expectation of the Federal Reserve’s change in interest rate as well as a surprisingly positive monthly job report. Markets continued to fall as Jerome Powell took his seat as the fed’s new chairperson. And yet, the week ended on an upswing, with the Dow Jones closing at the relatively normal 24,190.90.
Such fluctuations actually evidence a healthy ebb and flow of the international economy. Traders have grown accustomed to a less volatile market in recent years, but history shows that the stock market experiences peaks and troughs regularly within a week. But the influx of news articles on the Dow Jones and international markets last week would indicate otherwise. The mass media covered every slight fluctuation in the stock market last week, giving too much attention to small changes and neglecting to give the markets’ overall context. With such a sensitive, complicated and interconnected stock market, the general public should not be shocked by this kind of movement in the markets.