Last week's stock market chaos has many people spooked. It is not financial armageddon. It just marks the return to normalcy.
Ever since the crash of 2008, the economy has been living in a government induced coma. First the big financial firms and banks were put on life support with massive cash injections through the Troubled Asset Relief Program, or TARP. This was followed by a wave of financial and business regulations that curtailed business investment at a time when business investment should have been encouraged. The result was the slowest economic recovery on record.
Meanwhile in 2009, Congress passed an $800 billion stimulus program followed by a massive increase in federal deficit spending. The Federal Reserve was caught between a need to keep interest rates low to aid the recovery and burgeoning federal borrowing that would normally drive interest rates up.
The Federal Reserve solved this dilemma by "buying" the new government debt, in effect printing money. As a result, interest was kept at historically low rates allowing the government to double the national debt during the Obama administration with little effect on government spending. Low interest rates also helped the housing market recover from the 2008 crash, but proved of little use for business expansion because of the increased government regulations. And investors, unable to get a fair yield on their savings, were driven into the stock markets, fueling a nine-year stock really without boosting the economy.
With the arrival of the Trump presidency, the economy woke up. Regulatory and tax reforms have caused a jump in economic growth. Unemployment is down, and wages are up. All of this means that the Federal Reserve can no longer keep interest rates artificially low. Market forces will come back into play as businesses and the government compete for funds. Normalcy is returning to the bond markets, and interest rates are going up.
Higher interest rates mean lower stock prices and we have seen a drop of about 10 percent. The good news is that as of Friday, February 9 the lower stock values have brought the stock market price earnings ratio back in line with the normal ratio of 16 to 1. Don't be surprised if the stock the stock market sinks lower, since markets often go to excess. It is all just a sign that normalcy is returning to the stock markets.
Look for interest rates to go up and the stock market to go up and down around its current levels. But the economy is strong and growing, so it should all work out, if the politicians don't mess things up.
Welcome to a normal economy.
Ron Allen is a Christian businessman, CPA and author who serves in local, national and international ministries, spreading a message of reconciliation to God, to men and between believers. He is founder of the International Star Bible Society, telling how the heavens declare the glory of God; the Emancipation Network, which helps people escape from financial bondage; and co-founder with his wife, Pat, of Corporate Prayer Resources, dedicated to helping intercessors.
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