The main reason why the Dow Jones industrial average is skidding downwards is because of the fact that more and more traders are convinced that the US Federal Reserve will raise interest rates. Whenever interest rates go up, the stock market takes a bath. That has always been the rule, unless of course the interest rate hike has already been factored in to the stock market’s pricing. It appears that the erosion of the Dow Jones industrial average, as well as the NASDAQ 500, is in keeping with this market process. Right now, the market is groping in the dark as to how much that interest rate hike would be.
It is worth noting that, even though the rate of inflation in the US has grown at such an anemic rate, this hasn’t dispelled fears of an interest rate hike. It appears that the US Federal Reserve has its eyes on the long game. It is looking at several quarters down the road. The primary fear is that if the US job market continues to expand and the historically low labor participation rate doesn’t change, this can produce an explosive inflation scenario.
Think about it. If the historically low percentage of Americans aged 25 to 54 have completely stopped looking for work, the economy continues to improve, and more and more workers are needed, this would put tremendous upward pressure on US wages. As employers pay more money for each new hire, this releases a lot of liquidity in the broader economy. This can lead to inflation heating up. There are a lot of assumptions within this scenario. Considering how weak the US economy has been in the past few years, it appears at least from my perspective that any fear of inflation exploding in the United States is premature. We are talking of being at least several years premature.
