New York: The White House moved to reassure markets after the Dow Jones Industrial Average index dropped by 1,175 points. The leading US stock market index on Monday closed down 4.6 per cent at 24,345.75, BBC reported.
The White House said: “The President’s focus is on our long-term economic fundamentals, which remain exceptionally strong.” The fall surpasses a previous record 777.68 points drop on the Dow Jones during the financial crisis in 2008. That came after Congress rebuffed a $700 billion bank bailout plan following the collapse of investment bank Lehman Brothers. Monday’s decline is the largest fall in percentage terms for the Dow since August 2011, when markets dropped in the aftermath of “Black Monday” when Standard & Poor’s downgraded its credit rating of the US.
US investors are reacting to changes in the outlook for the American and global economy, and what that might mean for the cost of borrowing. The stock market sell-off accelerated on Friday when the US Labour Department released employment numbers which showed stronger growth in wages than was anticipated. If salaries rise, the expectation is that people will spend more and push inflation higher.
To keep that under control, America’s central bank will need to raise interest rates, which has spooked investors who were expecting the US Federal Reserve to increase rates only two or three times this year. They now predict there may be a few more interest rate rises on the horizon. The decline in the Dow was closely followed by the wider S&P 500 stock index, down 4.1% and the technology-heavy Nasdaq, down 3.7%.
Monday’s sell-off was driven by firms moving to sell stocks to put more money into assets such as bonds which benefit from higher rates, says Erin Gibbs, portfolio manager for S&P Global Market Intelligence. “This isn’t a collapse of the economy. This isn’t a concern that markets aren’t going to do well, or that corporate America isn’t going to do well,” she said. “This is concern that the economy is actually doing much better than expected and so we need to re-evaluate.”
Stronger global growth has prompted central banks in Europe, Canada and elsewhere to ease away from policies put in place to stimulate the economy after the financial crisis. On Monday, Jerome Powell was sworn in as the new chair of the US Federal Reserve. The market declines, which spread globally, underscored the challenges he and other bankers face – to make decisions that sustain the growth of the economy without alarming investors.