There is nothing like a big stock market correction to focus everyone's attention on the macroeconomy, especially when it corresponds with an election season. Ever since the stock market started its recent decline about a month ago, I have observed — and participated in — a sharp rise in the number of discussions, questions, opinions and news stories about the dubious economic strategies currently being pursued by U.S. policymakers, especially as they pertain to rising interest rates.
Recent tweets and comments from President Donald Trump are unambiguous about his level of dissatisfaction with the current Fed policy of gradually increasing the Fed Funds Rate. Now maybe I am just over sensitive, but the frequency and intensity of these comments from the president and other like-minded market analysts seem to correspond to the decline in stock prices this past few weeks.
So as we all prepare to head to the polls next week — and also as we intensify our planning and forecasting efforts for the coming year — I feel compelled to offer my opinion about the recent volatility in the stock market, the underlying causes — both real and perceived — of the recent market correction, and how all of these trends affect my outlook for the plastics industry in the coming year.
First, let's take a step back and garner some longer-term perspective. The current bull market is more than 10 years old. And just since the beginning of 2016, the stock market is up a stellar 34 percent. It escalated 10 percent in 2016, it jumped 19 percent in 2017, and even with the latest drop it is still up 2 percent for the year in 2018. Clearly, the upward momentum is slowing, but the trend needed to decelerate. Everybody knows that markets fluctuate in a cyclical manner, and all will agree that after a long upward trend a correction is therapeutic. But when a correction is actually occurring, too many people get overly anxious.
The stock market is an excellent indicator of future economic activity, but it is only an indicator and it must be interpreted appropriately. The hackneyed adage "The stock market is not the economy" still applies. It is true that economic recessions are always preceded by a bear market, so we can never ignore what this very sensitive indicator is telling us.
But most times, it is too sensitive. Growth in the economy did not skyrocket after last year's sharp rise in the market, and we are not going into a recession in 2019 just because the market turned down. Another tired, but still relevant adage "The stock market has predicted 10 of the past five recessions" is also apt at this moment.