WASHINGTON – One day the Dow Jones industrial average drops 500 points, then it shoots up 600 points and a few days later it plummets 800 points — 799 to be exact Tuesday.
What in the name of Warren Buffett is going on?
Financial markets have been highly volatile the last few weeks, knocked up and down by several key factors beyond the usual day-to-day movements related to specific companies. Here’s a Q&A to help explain what’s going on.
Q: What’s causing the market volatility?
A: Let’s start with trade.
The ongoing trade war between the U.S. and China has weighed heavily on investors. With the two nations slapping tariffs on each other’s products and threatening more, investors have been wary about the effect on companies that rely on exports and imports.
Q: But weren’t stocks just up Monday because of optimism about trade?
A: Yes, those worries were eased over the weekend when President Donald Trump and Chinese President Xi Jinping emerged from the Group of 20 economic summit in Argentina to announce a 90-day truce in the escalating trade battle.
Trump added to the exuberance by tweeting late Sunday that China has agreed to eliminate tariffs on U.S. auto imports. The development helped send stocks higher when financial markets opened Monday.
Q: So what happened on Tuesday?
A: Questions have started to arise about how much progress was made in Argentina. Chinese officials said nothing about the auto tariffs, and top Trump administration officials said there was no specific agreement on that point.
Trump poured more cold water on hopes that the trade war was close to being resolved by tweeting Tuesday that “I am a Tariff Man” and that the U.S. was taking in billions of dollars from the levies. He indicated he’s willing to keep the tariffs in place if trade talks with China don’t produce results.
Those comments helped accelerate Tuesday’s sell-off.
“I think the market is now in a wait-and-see, and the market is trying to figure out is there going to be a real deal at the end of 90 days or not,” Treasury Secretary Steven Mnuchin said Tuesday. “Whether we can get that to a real agreement or at least make a lot of progress over the 90-day period, time will tell.”
Q: Why is everybody so worried about the U.S.-China trade dispute?
A: The U.S. and China are the world’s two largest economies. Their trade war has ripple effects around the globe. The Organization for Economic Cooperation and Development recently forecast worldwide economic growth would slow to 3.5 percent next year from this year’s 3.7 percent. Trade tensions were a major reason.
Q: Are their other reasons why global economic growth is slowing?
A: Yes. The Federal Reserve has been slowly raising a key interest rate over the past couple of years. They’ve been doing that as the U.S. economy has strengthened to try to head off potentially high inflation.
Rising interest rates help slow the economy by making it less enticing to borrow money. Trump hasn’t been happy about the increases. Fed officials have indicated they remain on track for another small rate hike this month but could slow the pace next year based on incoming economic and financial data.
Still, Fed Chairman Jerome Powell was mostly upbeat about the economy in a speech last week, saying, “There is a great deal to like about this outlook.”
Another top official, John Williams, president of the Federal Reserve Bank of New York, told reporters Tuesday that “the U.S. economy is strong,” although he added there were “definitely some risks on the horizon.”
So there is still room for the Fed’s interest rate to rise before it hits a level at which it would be deemed to be neutral - the point at which it isn’t speeding up or slowing down the economy.
Q: How do the Fed’s interest rate hikes affect the stock market?
A: A couple of ways. First, higher interest rates make stocks a less-attractive investment than buying bonds or just saving the money. Also, the higher U.S. interest rate draws investments that might have gone to developing economies around the world in search of higher returns. That slows the growth of those economies, which has a spillover effect on the world economy.