After a year of staggering rises in the stock markets, two days ago, the inevitable happened: a reset of sorts hit the American indices. By the time this publishes today, New Zealand will know if the reset has hit us as well.
So, what was the reset on the Dow Jones and the NASDAQ all about? In the last 12 months the Dow Jones has climbed nearly 25% to reach – before it plunged – 26,000 points last week. The causes could be several – a strident America first policy by President Donald Trump to keep American jobs in America by withdrawing from the Trans Pacific Partnership Agreement, cutting taxes and supposed red tape
But since about 2014 there has been growing disquiet about the potential for a massive stock market crash. Some analysts say conditions have not been this good for a crash since 1929 and others say since the more recent “Black Monday” of 1987 where the Dow Jones plunged from around 2400 to 1500 in just a matter of hours.
In New Zealand the Black Tuesday (it was Monday in the U.S. when the Dow Jones crashed)crash was particularly destructive since the Reserve Bank of New Zealand refused to loosen monetary controls in response. The New Zealand Stock Exchange (as it was known then)lost 60% and took years to recover.
Why should New Zealand be concerned? Several reasons:
- The Obama Administration era Dodd-Frank bank reform laws are in danger of being repealed by the Trump Administration, looking to weaken or repeal laws seen as hindering business – these were meant to reduce the risk of another meltdown such as that of 2007-2009, called the Global Financial Crisis
- Our own banking system regulation could be be stronger too, and although some of 32 bank or financial institution collapses in New Zealand between 2007-2010 eventually resulted in prosecutions and jail time
- There is no doubt that cryptocurrency is an “in” thing to be seen with in some quarters. The explosive rise of bit coin and its now equally implosive collapse, losing two thirds of its value in just a couple of weeks, will have tied up significant funds worth hundreds of millions of dollars
- The property market and the dairy industry – both major players in the New Zealand economy are not sustainable in their current format. The rental property crisis has spread beyond Auckland and is affecting the ability of employers to hire; dairy has reached its environmental and social tipping point where the environmental costs are high enough that people are saying “enough”
- Would New Zealanders be more wary about investing in the market again after a major correction event
The Dow Jones plunged 1,500 points in a matter of minutes when it opened today. Since then the Nikkei Index and other significant index’s have had wild rides with the Nikkei at one point 7.1% poorer than when it opened for the day. The Australian ASX wiped 3.2% of its value.
Normally I do not pay much attention to the movements of the stock market. But in such volatile times as this, with considerable uncertainty on a number of fronts around the world – tensions with North Korea, the unpredictability of the Trump Administration and others – few should be surprised that the markets are having the wild time they are, and if predictions of a reset are about to come true, then things could get much wilder yet.