Why Equity Markets Sold Off So Much
Mohamed El-Erian
President @ Queens' College, Cambridge | Finance, Economics Expert
Several observers attributed Wednesday’s sharp (2.4%) selloff in US equities to President Obama’s re-election. But the major causes are elsewhere; and they remind investors of pre-existing concerns that unfortunately won’t go away quickly.
I was on a PIMCO trade floor when US equities started heading south yesterday. It was a little after 7 am on the east coast (4 am here in California). The trigger was a speech by Mario Draghi, the President of the European Central Bank. The result was an immediate sharp fall in European shares and in US futures.
Draghi echoed a theme highlighted in a prior LinkedIn post: the slowing of the German economy. Together with TV scenes of violence on the streets of Athens, this reminded investors that Europe’s crisis is far from over.
Draghi’s remarks were amplified by investors’ legitimate concerns on how/whether the new Congress would cooperate with President Obama to resolve the fiscal cliff – a self-inflicted problem that, if poorly handled, would push the US into recession. And this relates to a deeper and important question; and one that we need to monitor carefully in the months ahead.
As argued in another post, some serious soul searching is ahead for our two political parties.
In explaining how they lost an election that many expected them to win, Republicans need to figure out how to extend their base of strong/broad support beyond white men. Otherwise, demographic trends will continue to undermine their ability to capitalize on slippages by the other party.
Democrats have their issues too. Having won less than an overwhelming victory at the ballot box, they need to find a way to govern on behalf of the vast majority of Americans.
Both issues will be in play as politicians struggle to deal with the fiscal cliff. They will be even more visible as President Obama seeks to do in his second term what eluded him earlier –mobilize sufficient congressional support to maintain policies that sustain high growth, create meaningful jobs, and improve medium-term financial sustainability.
This article contains the current opinions of the author but not necessarily those of PIMCO. Such opinions are subject to change without notice. This article has been distributed for educational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission.
Senior Managing Director at Enclave Capital, LLC (FINRA, SIPC)
11yThe empirical data since WWI reflects one basic fact , that the US is responsible for the global economic cycles . While China and the EU are relevant economic zones , since 2009 the US was totally insulated from the European turmoil. While Germany is relevant to the EU expansion , it is irrelevant to the US economic momentum . While Greece makes an interesting headline , it contributes less than 3% to the EU 's GDP ANC certainly Greece has no economic impact on the US . In fact it could be argued that with the post Sandy reconstruction and facilitating monetary policy , the US economy is heading for a major economic upswing in 2013. Fiscal Cliff ? President Obama and some of the Republican leadership had expressed willingness to compromise . Than again what impact 500 billion dollars in tax increases has in a 15 trillion GDP economy . One thing for sure , market bears did manage to inflict fear in many investors utilizing fear. The reality implies a great 2013.
Project Lawyer - Green Line at The City of Calgary
11yI am not convinced by the argument that the Fiscal Cliff will result in a recession in America. To argue the debt is a drag on the economy, and so are cuts in spending, seems contradictory to me. Fiscal responsiblity will restore investors confidence and boost the economy. Yes, strong leadership and co-operation in reducing the debt would yield better results, but the Fiscal Cliff is better than no cuts at all.
Growth & Delivery Leader | Trusted Client Partner & Advisor | Digital Transformations, Product, Data & AI Solutions
11yI am hoping a potential forging of partnership between the leadership of two parties signals the end of stalement in Washington, an indication of US leadership, and boosting confidence in the US equity markets and the dollar in general.
Principal at Keystone CPAs
11yMr. El-Erian, While I agree that there is much truth to your argument. The fact is that high taxes and high regulation impute the growth of our economy. Obama's rhetoric of pro small business vs. his actions do not line up. We as Americans are the most giving people in the world, but the U.S. government feels that by confiscation and redistribution based on decisions of a central government are justified over the decisions of the individual. I do not believe that anyone can tell, with 100% certanity, what has caused stock market crash that has begun. That said I can tell you as a CPA, many of the small business I know have premade decisions to cut back, hunker down until the policies in Washington truly work for ALL AMERICANS. For example I know of several companies who have sent out layoff notices for the end of the year with a cumulative affect of around 600 people primarily due to the reelection of Obama. And unfortunately, these actions of small business are performed in fear for their survival. They are making hard decisions to protect what they have left. This I believe is Economics 101, the results. Real lives, real people and real business being affected negatively. With many politicians,especially Obama, never has had to make a payroll, or risk his savings to get ahead. So if this is the level of quality we should expect our country is in danger of repeating history and become second rate.