Last Thursday the New Zealand sharemarket suffered one of the largest daily falls it has seen, following Wall St like most other stockmarkets around the world. On Friday it fell further but bounced back up in the afternoon, though the US markets had not recovered. October is becoming notorious for this sort of turbulence and this time it comes as less of a surprise.
Stockmarkets, like property and other equity markets, have had a charmed life in the era of very low interest rates since the global financial crisis. With savings in banks offering very low, if any, returns, and not much business expansion during the post-crisis recession in the US and Europe, property and stocks were better investments.
But the days of low interest rates, in the US at least, are now numbered. The Federal Reserve began to raise interest rates from a very low base two years ago and has continued to raise them since the election of Donald Trump. It's need to do so became much greater when Trump lowered taxes and greatly increased government spending, adding fuel to an economy that was already recovering well when he took office.
The Fed is lifting interest rates to counter the risk that Trump's needless stimulus will erupt in inflation that would be hard to contain once it started. Central banks in the US, Europe and Japan created a lot of money to carry their countries through the recession and it needs to be enticed back into bank savings before it creates more demand than economic growth can meet, driving up prices.
Surprisingly, considering his unorthodox economic views, Trump has not so far tried to stop the Fed raising interest rates. US stockbrokers were probably expecting him to do so at some point in the past year or so, which could explain how the markets continued their good run for so long. But if their heavy fall last week reflects a realisation the President is not going to intervene in the Fed's upward interest rate track, the market's long bull run is probably over.
This would have reverberations for the NZX and other exchanges around the world, though small investors may be less exposed than those in the US and other places. Property appeared to be a much more popular investment here than shares through the era of low interest rates. House prices rose higher here proportionate to incomes than anywhere, while our confidence in sharemarkets remained as low as it has been since the 1987 crash, another October event.
If last week's dive was the start of a new phase in the US economy it would be good for the world. It would mean a decade of cheap money and excessive credit since the global crisis might not end in an era of inflation such as we suffered in the 1970s. Instead, the markets appear to be picking, interest rates will be allowed to do their work. At some point our Reserve Bank will have to follow the Fed if our dollar is not to fall too far against the US. This would not be welcomed by share traders and heavily mortgaged households but it would be good news for savers, those living on savings and for economic stability.