Raphael John-Lall
It may not have been the “Black Monday” that stock markets experienced in 1987, but last Monday’s stock market plunge around the world is already being described as a meltdown.
Black Monday was the severe global and largely unexpected stock market crash on Monday, October 19, 1987. Worldwide losses were estimated at US$1.71 trillion. The severity of the crash sparked fears of extended economic instability or even a reprise of the Great Depression.
US business newspaper Wall Street Journal in an article last Monday asked if the stock market slump on Monday was 1987 all over again.
“Financial markets are supposed to capture the wisdom of the crowd, but on Monday the crowd ran in all directions waving its hands in the air screaming. Japan’s stock market fell the most in 37 years with a 12 per cent plunge that wiped out all its gains for the year, while in the US the VIX index of implied stock volatility briefly had its biggest rise ever. Panic hit.”
The Wall Street Journal added that the selloff was triggered by the jobs data in the US prompting a sudden switch in the economic narrative from soft landing to hard landing.
As late as Friday, observers remained pessimistic as CNN, in an article, noted that Japanese stocks had quickly lost steam, as the specter of a US economic slowdown and further yen volatility cast a long shadow across global financial markets.
Several local economists spoke about the repercussions T&T can feel from Monday’s tumultuous international events.
Economist Vaalmikki Arjoon said it was a “Monday-Meltdown” in global stock markets as mass sell-offs resulted in a staggering US $6.4 trillion wipe-out.
“This largely stemmed from investor overreaction and panic about fears of an impending US recession, owing to recent US unemployment announcements, which highlighted that the job market – a key driver of the US economy – has lost steam. In July, the unemployment rate surged to a three-year high of 4.3 per cent, with new hires at only 114,000, well below the previously anticipated 175,000.”
He said this announcement triggered fears of an looming US recession among many investors, based on the “Sahm rule,” which posits that whenever the three-month average unemployment rate rises 0.5 per cent from the lowest point in the last 12 months, then the economy is in the early signs of a recession. Since January, it rose by 0.6 per cent.
“Indeed, employment levels in the US directly affect consumer spending, constituting a significant portion of economic activity. A higher unemployment rate of 4.3 per cent raised fears of declining consumer spending, lower business revenues, and operational cutbacks, driving concerns of an economic slowdown.”
Given that global financial markets are interconnected, Arjoon also noted that the mass sell-offs in the US triggered similar activity in Asian and European markets. Many companies in Europe and Asia are closely interconnected with the U.S. economy.
“Fears of an impending US recession can lead investors to anticipate that the financial performance of these companies will be negatively impacted, prompting them to sell-off stocks of these companies. Also, given that the US is the largest economy in the world, a sell-off in the US raised concerns about the health of the global economy, prompting investors to reassess risks and sell off equities in other markets. In Tokyo, the Nikkei was down 12 per cent. In Seoul, the Kospi sank 9 per cent.
“Investors often react to large market movements with a herd mentality. Seeing a significant sell-off in US markets can lead to fear and uncertainty, prompting investors globally to sell assets in other markets pre-emptively, fearing similar declines,” the economist said.
Local market
Speaking about T&T, Arjoon said the downturn in stock markets potentially decreases the value of the Heritage and Stabilisation Fund (HSF) due to its significant equity exposure, 25 per cent in US equities and 21 percent in international equities.
“The mass sell-off has driven stock prices down, lowering the value of the Fund’s investments. However, the fixed income portion of the HSF likely benefited from increased US Treasury bond purchases, as investors ‘flew’ to this safer asset, driving up bond prices. This could partially offset the equity losses, but given the extent of the equity market decline, the overall impact on the HSF is likely a decrease in value. Local institutional investors with US-dollar equity mutual funds and pension funds exposed to equity markets, have also been adversely affected, experiencing declines in their investment values. Those with substantial fixed income holdings have gained from rising bond prices.”
However, he said it is important to note that many local institutional investors employ a buy and hold strategy, which involves maintaining investments over the long term despite market fluctuations.
“This approach aims to capitalise on long-term growth and compounding returns. In the current scenario, these investors now have the opportunity to acquire US equities at reduced prices, positioning themselves to benefit from future price increases as the market recovers.”
Possible US recession
While U.S. political commentators and economists are already debating if there will be a recession, Arjoon said If the U.S. enters a recession, T&T will likely face significant ripple effects due to their status as T&T’s largest trading partner.
“A downturn in the US economy could lead to decreased imports of T&T’s manufactured goods, resulting in lower export revenues and forex earnings. Additionally, US-based Foreign Direct Investment (FDI) in our economy may diminish. The tourism sector might also suffer, as reduced travel by American tourists could lead to fewer visitors and decreased revenue. Our food processors, which supply food items to hotels across the Caribbean, could experience a decline in exports as tourism drops in the region.
“Moreover, a US recession could negatively impact revenue streams from other trading partners. As the US imports less from them, these partners might reduce their purchases from T&T. Furthermore, many Trinidadians living in the U.S. send remittances back home. A US recession could result in job losses or reduced income for these expatriates, leading to lower remittance flows to T&T,” he also said.
Softer impact
Former Central Bank Governor, Winston Dookeran, who has also held positions as planning minister and finance minister in different administrations over the last 40 years, told the Sunday Business Guardian that the T&T stock market is normally immune from these developments.
“I would not expect any volatility emerging. We need to watch interest rate movements and the Fed action, as that would affect the terms of financing for T&T, but not the stock market in T&T. The terms of financing could affect the macro behaviour of the T&T economy by increasing cost of transactions and applying pressure on foreign reserves.”
Economist Dr Vanus James told the Business Guardian that T&T much depends on the composition of the market and the investors involved and so the impact on T&T could be less severe.
“I do not have the data on that, but I think that the risk of transmission of high contagion is lower because the local stock market is not highly integrated into the international stock markets and so its sensitivity to the Fed policies is not as high.
“Plus, local government bonds are not likely to be as high an attractor to local investors, compared to local stocks. International bonds might be relatively attractive compared to local stock, but there is a foreign exchange barrier that limits movement out of local stocks into foreign bonds.
“Overall, then, not too much backlash. Our problems have much more to do with the failure to diversify the economy, increase innovative capacity, integrate more deeply into the global markets for goods and services, and the like,” said James.