CHINA RECENTLY MADE THE UNUSUAL MOVE of purposely devaluing its currency to stimulate a sagging economy. The effect was a shockwave of concern among investors around the globe, and over the last several days stock markets around the globe have lost considerable value. U.S. stock markets dropped for five straight days, punctuated by what many are calling Black Monday, when the Dow Jones dropped 588 points.
Many experts have been predicting a sell-off or correction in the stock market. A correction is generally defined as a 10-percent swing in the overall value of the market. With Monday’s losses, U.S. markets were close to this level of a drop in value.
Is it time to panic, sell everything, buy a bunch of gold and move into a cave somewhere? Perhaps a more measured approach would be more appropriate. First, let’s ask: Is there reason to think real estate values will plummet, leaving millions of homeowners underwater?
The cumulative losses of Friday and Monday are big for a two-day period, but not the worst and not even close to the cumulative losses that followed the credit freeze of 2008 — and they pale in comparison to the 22-percent loss suffered in the “Black Monday” crash of 1987.
And while all of the bad news was happening in the markets, U.S. consumers were reporting strong levels of confidence in the economy in a survey conducted by Nielsen and released by the Conference Board on Tuesday. Confidence rose to a reading of 101.5 in August, a strong rebound from July’s reading of 91.0.
The Conference Board’s Lynn Franco, director of economic indicators, cited consumers’ renewed confidence in the labor market for the improved reading in August, stating, “Consumers’ assessment of current conditions was considerably more upbeat, primarily due to a more favorable appraisal of the labor market. The uncertainty expressed last month about the short-term outlook has dissipated and consumers are once again feeling optimistic about the near future. Income expectations, however, were little improved.”
When our economy first started recovering from the Great Recession, many called it a “jobless recovery.” The economy was picking up steam but without significant improvement in the unemployment rate. It took years for the unemployment rate to drop, and now many Americans have jobs but have not seen any meaningful improvement to their incomes.
Is this drop in the stock market the harbinger of a coming recession? The cynical side of me says that a recession in 2016 is just not possible, as it is an election year and the politicos will find a way to prop up the economy. But then there is the other side that says perhaps the politicos not in power want a recession so they’ll try to manipulate the economy toward recession. That is the problem with being cynical: No matter how you slice it, someone is evil and taking advantage of someone else. Or is that just politics?
Personally, I believe that we are headed for a slowdown —not a horrific Great Recession with record levels of unemployment, but a cooling of an already anemic economy.
Is it time to sell everything? No, I don’t think so — but I do believe it is a good time to be especially cautious.
Guy Benjamin (CAL BRE License #01014834, NMLS 887909) writes a weekly column for The Herald, offering general information on real estate matters. As it is impossible to address all possibilities and variations, he will try to answer individual questions by readers who contact him at 707-246-0949 or firstname.lastname@example.org.