'Normal people should try to ignore' market volatility: ex-Goldman Sachs economist

  1. We interviewed Lord Jim O'Neill on recent market slides
  2. 'We have just ended this crazy period of low volatility'
  3. 'Normal people should try hard to ignore it'
  4. 'An overdue reaction driven by stronger economic recovery'

A week of dramatic movement in global stock markets marked the almost inevitable end to a “crazy period of low volatility,” according to the former chief economist at Goldman Sachs Lord Jim O’Neill, who explained to WikiTribune what he made of the turmoil on asset markets.

O’Neill said that “normal people should try hard to ignore” the current stock market instability, as it is “an overdue reaction driven by stronger economic recovery,” which will “only become really serious if we get much stronger evidence of inflation picking up everywhere.”

When U.S. exchanges closed on February 2, they ended “the worst week in years” and when they reopened on February 5, the Dow Jones Industrial Average suffered the biggest single day points fall on record. (CNN)

“We have just ended this crazy period of low volatility” – Lord O’Neill

The volatility continued throughout the week, and spread to indexes around the world, leaving traders and analysts to explain where it came from, and how long it would last.

When the Dow broke records in January, U.S. President Donald J. Trump heralded it as a sign that the economy was booming. This week he was less effusive on what to make of the index’s fall, writing on Twitter that: “In the ‘old days,’ when good news was reported, the Stock Market would go up. Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (great) news about the economy!”

Jim O'Neill, picture courtesy of Jim O'Neill (copyright held by subject)
Jim O’Neill, picture courtesy of Jim O’Neill (copyright held by subject)

O’Neill, who retired as chairman of Goldman Sachs Asset Management in 2013,  emphasized that he is no longer actively involved in markets day-to-day, currently serves as a cross-bench peer in the UK House of Lords, and famously coined the acronym “BRIC” to refer to the world’s largest emerging economies.

He told WikiTribune that while the recent movement appears to be a “correction” as markets react to over-evaluation and should be nothing to worry about in the long term, there could be plenty more volatility in store over the next few weeks.

WikiTribune: Can you explain why, in your view, indexes dropped so sharply this week? When do you expect markets to settle down?

Lord O’Neill: There are two clearly related factors. First, the world economy has picked up steam throughout the last year, and is probably currently growing between 4 to 4.5 percent – the strongest for well over a decade. And virtually every one of the top 10 largest economies is participating (with the possible exception of Brexit-obsessed Britain, although strength elsewhere is helping the UK also).

Then secondly, linked to this, we have the creeping signs of rising wage inflation from last Friday’s data in the U.S. While this is welcome for normal human beings and policymakers, it also means there is an issue about the Federal Reserve needing to raise interest rates more than expected.

And the broader issue, as highlighted by the Bank of England in the past 24 hours: could we see the same thing happening elsewhere? Have we reached the end of Quantitative Easing and emergency monetary policy across the West? This is what markets are digesting and the correction is perfectly understandable, and indeed, maybe even justifiable after such a massive rally.

I suspect things will remain volatile, and certainly not calm, at least until we get the same economic report at the start of next month. But I don’t think this is anything like 2008-09, and I doubt this will be a sustained bear market [general decline in the stock market over a period of time]. We have just ended this crazy period of low volatility.

WikiTribune: How much do you think can be read from rises and falls in indexes, regarding the health of the respective economy?

Lord O’Neill: Given that most of this action has been driven by the U.S., especially their wage inflation data, I think it is not sensible to link it to many other economies. It is simply that markets are correlated, and we have had massive rallies everywhere. That said, often when markets do their “thing” they tell us more than we knew before, and if some markets react even worse than the U.S., it suggests either excessive leverage in their rallies, and/or their economies might not be robust.

I will be watching, as I am sure many others will be, the performance of China closely in this regard, especially because it has been so important to the world economic upswing.

WikiTribune: How, or at what point, does market instability such as this begin to affect ordinary people – through jobs, inflation, the value of savings, etc.?

I think normal people should try hard to ignore it, and if they have any exposure to markets directly, or via their pensions or other advisors, ask them.

It is an overdue reaction driven by stronger economic recovery, and it will only become really serious if we get much stronger evidence of inflation picking up everywhere. If we were to drop another 10 to 15 percent around the world, I would think it would be attractive for serious investors to start buying – not that I am suggesting we will definitely drop another 10 to 15 percent I hasten to add!

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