At midday on Monday, the first U.S. stock trading day of 2016, the Dow Jones Industrial Index of stocks was down over 400 points. At one point in the trading day the index had fallen 450 points. By the closing bell the index gained back some of those losses but still closed down 276 points for a loss of 1.6%. It was the worst opening day of a new year for the Dow since 2008. One analyst, a former Wells Fargo Chairman, warned that parts of the stock market were in a Federal Reserve induced bubble that could pop in 2016.
Among the worries that investors are reacting to is the weakening of the Chinese economy. China growth rates have fallen from the double digit range to 7 percent recently. China is a big world trader and trouble there could spread to other economies. Chinese stocks have taken a hit. In fact, the volatile path of the Dow index on Monday came after a 7% decline in mainland Chinese stocks that led Chinese authorities to halt trading.
The fall in U.S. stock prices could also reflect investors’ concerns over Federal Reserve policy on interest rates. The Fed raised a key interest rate on December 16 of last year, the first move away from its zero interest rate policy that it has used to spur the economic recovery from the 2008 financial disaster.
In other news that made investors jittery, the two Middle East power houses, Iran and Saudi Arabia, severed diplomatic ties over the Saudi execution of a Shia religious leader. More strife between Iran and Saudi Arabia can make things worse in the troubled oil rich region, and that could lead to a reversal in the falling price of oil, which has recently helped buoy the U.S. economy.
Others have warned that current U.S. stock prices may indicate a bubble, implying either losses or low or flat returns going forward. In September 2015 when the Dow was at 16,400 compared to the 17,400 at the start of trading on Monday, Robert Shiller, a Nobel prize winning economist and expert on bubbles, including the housing bubble of 2008, warned that stock prices had tripled since 2009 and could be in a bubble.
In April 2015, economic analyst Jesse Columbo wrote on Forbes.com that the current U.S. stock market is in a bubble that is the third such bubble since the mid-1990s. The first was the dot-com bubble of the 90s, the second was the mid-2000s housing bubble, and now we are in a stock market bubble.
And last October none other than Donald Trump, front runner for the Republican presidential nomination, argued during an interview that U.S. stock prices had entered bubble territory, and that the Federal Reserve zero interest rate policy that was partly responsible for this was being followed by the Fed in order to keep the economy out of recession before Obama leaves office.
So what do you think? Are we in a stock market bubble? Is the Fed to blame?