Prof. Isberg: Stock Drop is Alarming - But Perhaps Inevitable
February 7, 2018
Contact: Office of Government and Public Affairs
Steve Isberg, associate professor in the University of Baltimore's Merrick School of Business, writes in The Baltimore Sun that this month's extreme volatility in the stock market is eye-opening—but something that was bound to happen given long-standing economic conditions. The real question, he says, is whether these losses can be managed if more bad news comes to pass.
"The markets of the past 50 years have been, and will continue to be, about one thing: growth. Companies whose earnings do not grow are penalized in the markets," Isberg writes. "Over the past 30 years, during which earnings growth hasn’t been stellar, market values have instead been driven by Federal Reserve-induced low interest rates leading to corporate share repurchase strategies and merger and acquisition activity. In just the past 22 years, the number of publicly traded companies has fallen by 46 percent."
Isberg cites the recently passed corporate tax cut as a major cause of a too-rapid climb in stock prices. Now that the cut has become law, reality is setting in for market traders, analysts and investors large and small. A one-time gain prompted by the rate cut, he says, is meshing poorly with pent-up demand for higher wages, overdue Federal Reserve actions to hedge off inflation, and other problems that require attention, such as the booming federal deficit. The result: Market volatility that likes of which haven't been seen in years.
Still, Isberg notes, there are sensible solutions out there. Investors should "consider what is driving these markets, and has been for a long time now," he says. "Wall Street has to change its ways. As a nation, we must get back to building and sustaining an economy that rewards actual growth—not consolidation."
Read the op-ed.