US stock markets tumbled last night with the S&P500 down 1.5% and the NASDAQ down 2.5%. There was no obvious reason for it. Data was weak suggesting the Fed will struggle to hike rates but Fed governor Jeffrey Lacker spoke hawkishly anyway. Not a lot to go on, but perhaps enough given how stretched valuations are and how reliant upon low interest rates.
In timely fashion, the US government’s Office of Financial Research has produced an excellent document illustrating both.
Extreme asset valuations can have implications for financial stability. Although the bursting of the technology stock bubble in the early 2000s did not disrupt the functioning of financial markets, the other two major crashes of the past century, following the 1929 and 2007 peaks, contributed to widespread financial instability.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
