Was it just a temporary aberration, or was there something more sinister at work on Tuesday?
In the US, yesterday, markets staged something of a comeback, with shares up 52 points compared to Tuesday’s 416 drop. But elsewhere the selling frenzy continued. The FTSE 100 fell 114 points, finally taking it to below the start of year price, while in Germany the DAX continued its downward slide. As for China, where it all started, markets rose back up again yesterday, recovering around a third of the previous day’s losses, but, as of the time of writing, the markets are back down again.
But the question that really needs asking - and then hopefully answering - is this: were the falls in the US and London simply a reaction to the Chinese fall? If this is the case, frankly it’s not too serious. The Chinese economy is strong - it’s just that the market got a little ahead of itself, and needed a correction to give fundamentals time to catch up with valuations. Or was there another factor at work?
In the US, there are other certainly more serious problems lurking - we alluded to it yesterday - and the fear is that the falls were a symptom of deeper worries.
Alan Greenspan, former Fed chairman and wise man of economics, didn’t help when he warned that the US could hit recession by the end of this year. But his comments weren’t widely reported until after markets fell. It was as if markets fell, and then looked for an excuse. (Incidentally, now they are saying Mr Greenspan was, in fact, making an academic point - and when he said recession was possible, he meant precisely that. Recession is, after all, always possible.)
But then yesterday, two pieces of economic data slipped out that might well have spelt a big fall in shares - if it hadn’t been for the previous day’s losses.
First of all, the US Commerce Department revised its GDP figures for the final quarter of last year. When it first published the data, it had GDP growing in the last quarter at an annualised rate of 3.5 percent - not bad at all. But, since then, the statisticians at the Commerce Department have been busy with their slide rules and rehearsing their times tables, only to find that actually the US grew at an annualised rate of just 2.2 percent.
It was two sets of figures that were completely revised that led to the change. Firstly, investment in the quarter was much, much lower than previously estimated, while inventory levels dipped dramatically.
When you consider that the warm weather and falling cost of fuel acted to boost US consumer spending by 4.2 percent in the quarter, you begin to realise how serious things are. Without this rise in consumption, GDP growth would have been much lower still.
And then, we can turn our attention to the US housing market. The latest official data has revealed that January saw a 16.6 percent fall in sales of new homes from the previous month. That’s the biggest drop in 13 years, and must rekindle fears about a slowing US housing market. Up to the publication of these data, the general thinking was that the market was already over the worst.
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