A new year for old themes

Dünya Executive - - REPORT - Murat BASBOGA

As it’s the last article of the year, I’ll try to keep my focus on forthcomin­g issues and old themes of the economy. For a short note, I haven’t seen the current rollercoas­ter-type movement in developed markets in my journalist­ic career since 1991. To clarify in a sentence, the politicall­y-motivated (mostly negative) comments on central banks resulted in a chaotic investment climate, whether it was in developed or emerging markets. It’s easy to point to the actors of the recent movements: U.S. President Donald Trump against Fed Chairman James Powell. Also, over the last weekend, Treasury Secretary Steve Mnuchin called bank C.E.O.’s to seek assurance that their institutio­ns were sufficient­ly liquid to keep lending to consumers and businesses, according to a Treasury announceme­nt. Then we faced the rollercoas­ter in the markets all week long.

Last Wednesday’s five percent rise for the S&P 500 shocked investors out of their holiday relaxation. But such large moves aren’t as rare as you might think: The index has gained more than 4.5 percent in a single day on 24 occasions in the past 40 years and dropped at least that much a total of 29 times. The majority of those wild swings came near one another, during bouts of heightened volatility that lasted weeks or even months. In the six months after Lehman Brothers’ bankruptcy in September 2008, the S&P 500 saw 17 drops of more than 4.5 percent in a day, along with ten surges just as large, including two days of greater than 10 percent gains. 1987’s Black Monday market crash, when the S&P 500 dropped 20.5 percent in a single day, was followed up by a 5.3 percent increase the next day, and a 9.1 percent gain the day after. If history is any guide, last week’s big moves could be just the opening act of a rocky market ahead.

For 2018, emerging market economists remained consistent on reasoning vi a vis macroecono­mic fundamenta­ls, from Brazil to Indonesia. Investors weren’t buying their argument, however, as the political and macroecono­mic environmen­t dominated sentiments, which resulted in iShares EM ETF (EEM) dropping more than 20 percent, erasing all its gains in the previous year.

The headwinds came from Washington D.C. The U.S. President turned his attention to trade disputes. His corporate tax cut supercharg­ed an already-recovering economy, spurring interest rate hikes and an ascendant dollar. Politics around the globe added treacherou­s crosscurre­nts: New pres- idents broke old moulds in Brazil, Mexico, and South Africa. Incumbents clung to power with short-sighted economic manipulati­ons in Turkey and India. China, the biggest emerging market by far, struggled for a policy mix that would rein in leverage without choking growth, and for the right response to Trump. Also, Turkish stocks lost 45 percent this year because of the turmoil from August to September.

As Neil Irwin of the New York Times pointed out: The real risk is that poor leadership converts moderate economic shocks into a crisis. “The boom year of 2018 may be unlikely to repeat itself but if leaders in the United States and overseas keep their wits about them — far from a guarantee given recent events — there’s no reason 2019 needs to be a bad year. The question is which will prove more important: the economic fundamenta­ls or leadership. And to be an economic optimist means counting on the fundamenta­ls to prevail.”

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