Stocks Suffer From New Year’s Hangover

A drop after a strong 2013

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Seth Wenig / AP

A trader wears glasses celebrating the new year while working on the floor at the New York Stock Exchange in New York City, on Dec. 31, 2013.

Updated at on Jan. 2 at 4:10 p.m. EST.

After a giddy 2013, stocks fell sharply on 2014’s first day of trading Thursday. The Dow Jones Industrial Average was down 135 points, or 0.8 percent at close, and the S&P 500 had fallen 16 points, or .9 percent.

Though data released Thursday morning pointed toward a stronger economy, market watchers believe that good news was already anticipated by traders and that the post-New Year’s plunge was simply a backlash against the strong surge in stock prices at the end of December. The Dow Jones Industrial Average, for instance, gained 3.55 percent in December and 23.59 percent for the year in 2013.

“The trend in the data really isn’t the problem, they suggest we’re getting some improvement in the fundamentals.” Bruce McCain, chief investment strategist at Key Private Bank told CNBC. “But the markets have been superlative, and you can only keep that up for so long. At some point we get a stronger corrective pullback than we’ve seen in the last few years or so.”


The article reads, '“The trend in the data really isn’t the problem, they suggest we’re getting some improvement in the fundamentals.” Bruce McCain, chief investment strategist at Key Private Bank told CNBC."

And what did Time think an investment strategist would say? "Sell everything!"? So why even bother to go to such people? The only profession Time should be posing questions to on the economy are economists. That is, interview three or four economists from varying methodological backgrounds, and then we can figure out later who came closest to the truth, meaning that economist's economic methodology is robust/explanatory.

At any rate, I can tell you what's just around the economic downturn worse than 2008's. If you've been paying attention, none of the Fed's so-called Quantitative Easing (remember when it was called credit expansion?) is being invested in new (net) investments. It's all (1) going towards the buying and selling of stock; (2) capital depreciation on old investments (meaning the company can save its depreciation costs!); and (3) nice fat salaries/bonuses for those who get the Fed's QE to play with. Soon interest rates will have to rise to spur on the real economy (new investments need massive amounts of savings, such quantities of savings being the result of the lure of higher interest rates), and when they do, watch for the necessary economic downturn as malinvestments are flushed from the system.


@tom.litton says, "Raising interest rates leads to lower GDP (ie less investment):"

Higher interest rates are what attracts savings for investments! Do you (1) consume more; or (2) invest more, when interest rates are relatively higher? People invest more with relatively higher interest rates, because of the lure of a higher interest dividend. Then as the economy becomes more productive, due to falling prices, people tend to save even more in the knowledge that consumption goods will be cheaper tomorrow if they wait. 

"Also, most of the QE money is just sitting in banks neither helping the economy or causing inflation:"

Yes, you're right, approximately 81.5% is idle, and now you know why. There's no expected return on net (new) investments, because the return (interest) is ludicrously low. 


@DeanJackson That isn't how it works.  Read the links.  Lower interest rates leads to more investments (because it's cheaper to take out loans), and therefore less unemployment.

The problem isn't that they are too low, it's that they are too high (even at near 0%).  Read this as well:


@tom.litton says, "Read the links"

You gave me links to economic models that are (1) ludicrously illogical; and (2) incomplete. 

Now, those models also don't explain the six-year dearth in net investments.

In the real world of economics a central bank can't create real demand, since there is no such demand by people, therefore any credit expansion is by definition a malinvestment. It is the unhampered interest rate, which is the sum of all consumers' time preferences divided by the number of consumers, that determines consumption/investment schedules. And when consumers decide to invest more (by consuming less), they are setting into motion market forces where banks/investment firms compete for those increased savings by bidding up the interest paid. With increased savings for investments, the prices of consumption goods decline, while the prices of capital goods increases by the same amount. inflation! In fact, when the new consumption goods arrive on the market (produced with the previously mentioned savings/investment monies), general prices decline, producing an appreciating currency! 

When interest rates are relatively high, central bank credit expansion creates a boom in the capital goods industries (have you noticed that?) without a necessary drop in consumption (hence inflation), however when interest rates are relatively low, the credit expansion has few places to go other than non-market based asset speculation, as we've seen the last several years.

How is it forgotten that the Law of Marginal Utility (diminishing returns) applies to all economic activity, including interest rates; there is an optimum return associated with a market-derived interest rate, however artificial increases/decreases in interest rates diminish optimum returns.