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The International Stock Market Indices: Sensitive, Interconnected Beasts

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.

This graph displays the FTSE, the DOW and the NIKKEI for the past two years. It shows how they seem to mirror each other. When one spikes or dips the others have a similar movement.

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.

This graph shows general Google search interest from users in the United States. The Dow Jones is in blue. The FTSE 100 in red and the Nikkei 225 in yellow. Google searches related to the Dow Jones were at their highest level this past week. There was minimal search interest in the Nikkei and almost no users were actively looking for information pertaining to the FTSE 100.
This graph shows general Google search interest from users in the United Kingdom. The FTSE 100 is in red. The Dow Jones is blue and the Nikkei 225 in yellow. Google searches related to the FTSE 100 were at their highest level this past week. There was considerable interest in the Dow's performance and almost no users were concenred with the Nikkei.
This graph shows general Google search interest from users in Japan. The NIkkei 225 is in yellow. The Dow Jones is blue and the FTSE 100  in red. Google searches related to the Nikkei were at their highest level this past week. There was considerable interest in the Dow's performance and while there was some interest with the FTSE 100, it is almost immeasurable.

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.

12 thoughts on “The International Stock Market Indices: Sensitive, Interconnected Beasts

  1. mannm20

    The interconnectedness of international economies really speaks volumes to the globalization of our world today and the importance of an international market. What motives would the media have to make this "trough" of a week appear as significantly worse? Aside from diminishing global markets, how does this negative report influence the Americans and the world as a whole?

  2. riversc20

    The graph comparing the DOW, FTSE and NIKKEI for the past two years gives strong evidence to your observation of how interconnected these markets are. This, as you stated, makes it no surprise that fluctuations in the Dow during its "Worst Week In Two Years" have drawn a lot of attention and incited a multitude of articles. I hope these fluctuations are simply "a healthy ebb and flow", not a sign of worse things to come.

  3. dugganj20

    I think the interconnectedness of global economies is a very intricate network that represents the progress of globalization. It is very smart of the above mentioned European countries to research how the U.S. stock market is performing, and the U.S. should consequently be looking at how other global economies are performing as well. The fact that we all engage in trade with each other, as well as invest in international stocks, should be reason enough to be aware of how economies besides are own are performing.

    1. ingramk20

      It's interesting to me, though, that Americans only searched the state of the Dow and not the FTSE and NIKKEI. What does this say that concerned British and Japanese investors/ laymen take into account the other international indices while we don't? Does this represent some very North American-centric conception of the global economy? I don't really know, but I think we as Americans would probably be better served by understanding the interconnectedness of international indices.

  4. dodsonm20

    Since the google graphs and post suggest other countries care more about the sate of the Dow than the US cares about other markets in other countries, do you think that if a market like Japan's were to experience a sharp decline like the one the Dow experienced, the US markets would also decline in reaction? As the globalization of markets continues to expand, it is interesting to note which countries emerge as bigger factors to market fluctuations.

  5. prochniaka20

    It's interesting to see how the media can blow problems out of proportion and cause a widespread panic, even when the economy is just behaving normally. If more people understood the ebbs and flows of the economy, fluctuations would not seem as drastic.

  6. scottm20

    I find the widespread interconnected performance of international stock market indices extremely interesting. Represented best through the google search graphics, which in themselves are fascinating, the world is nearing a point of uniformity when it comes to market news. As reports are released embodying certain forecasts, international indices responds accordingly by following similar trends regardless of their direct relationship to the reports. Granted, most central banks will act in homogenous manners, the global markets are more interconnected than ever before.

  7. bullr20

    Its interesting to think of how globalization and media coverage interact with the stock market in increasingly impactful ways. The stock market is recognized as a Chaos Level 2 system, meaning that observation of and speculation about stock activity actually greatly affects the market itself. It seems to me that the media is incentivized to deliver alarmist reports about natural fluctuations, as their consumers demand that sort of hyper-coverage. Globalization also seems likely to exaggerate stock market speculation, as the the market expands from national stocks and investors to international stocks and investors. It would be interesting to see how the system adapts to mitigate the heightened volatility spurred by media coverage and international speculation.

  8. the prof

    One strand of finance literature looks to very detailed time-of-trading data. If markets declined, which did so first? That can get at whether what happened in the US affected the stock markets in other countries. The studies I've read are "announcement studies" that look at the release time of news (as in not expected information, not news as in media). Did markets react? If so, which was first?

    Anyway, in the background is the inverse relationship between stock prices and interest rates. We'll see more this week (Mar 19-23) with the FOMC meeting.

  9. Mariam Samuel

    The interconnectedness of the world through globalization has both negatives and positives. It seems that when one person wins, everyone wins a little bit, but when one person loses, the ripple effect is greater. I think the index search data does, however, speak to the priorities of the United States, and the different way which we look at economics. We are often criticized globally for our priorities, and this is definitely an indicator that as a country, we need to do more research and pay more attention to what is happening within the economy. We are generally a very centrist population, and the effects of other countries on us and vice versa should definitely be addressed when making political decisions.

  10. skinnerf20

    It's interesting to note how interconnected global markets are to each other and the influences parts of the economy have on these markets. If investors are able to predict the net effect on the economy for a seemingly positive movement, such as increased jobs, would the stock market be less volatile?

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