It’s now a correction. Yesterday, the Dow Jones Industrial Average fell by another 237 points and all of a sudden the index is now more than 10 per cent below its year peak, seen on October 9. In fact the index is now 1,420 points from the record. That works out as just over 10 per cent.
Any fall from peak to trough of 10 per cent is dubbed a correction.
Curiously, the FTSE 100 has performed a lot better over the last few days, and as of last night was 8.1 per cent below its peak seen on July 2.
It appears that actually, reality has dawned on markets. For much of this year, fears that the US could hit recession have been growing and it felt like the biggest export from the US this year has been woe. Yet exuberance seems to permeate markets like soft sand, providing a comfortable place to bury one’s head.
Yesterday, it seemed that at last we had good news. Shopping numbers last Friday, the big shopping day after Thanksgiving were up. Phew. But then, analysts thought about it some more. Sure, volumes were up, more people were out there, but spending per person was down and, more to the point, perhaps the reason why numbers were up was because of the strong price discounting.
Bargains galore mean more shoppers, but it doesn’t necessarily mean more profit.
It seems there is now a growing chorus of pundits predicting a US recession next year. The shocking state of US housing, at a time of a record oil price, at a time when the US indigenous automobile industry is struggling for its very survival, is all proving rather a lot for Uncle Sam to carry on his broad shoulders.
But not everyone has gone all pessimistic. Last year, Capital Economics repeatedly warned that analysts had underestimated the seriousness of the US housing market, and predicted much tougher times ahead for the US. But it never suggested the economy would hit recession, and it is sticking to that prediction. Yesterday, its US economist Paul Ashworth said, “All things considered, it doesn’t look good. Nevertheless, we suspect that the economy will still avoid a recession, based on the widely-used definition of two consecutive quarters of negative growth, thanks to a partial rebound in the first three months of next year. Real incomes should be stabilising by then, unless energy prices continue to surge, and the inventory component should have a more benign effect.”
It does all seem to depend, though, on how serious you think US debt is, and from that you can draw your conclusion about the UK too. If you think the US consumer is suffering a mere hiccup, and that once the sub-prime mess has been sorted out, everything will go back to normal, and that once again US consumers will go out spending, then you probably think the current crisis is none too serious. A mere blip on the path to growth.
But if you think debt is a major problem, and that we simply are borrowing more than we can afford, then, no doubt, you think the current crisis is a taster of far worse things to come.
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