Stockmarket crash: looking for correction’s silver lining

If ever there was a time to breathe a sigh of relief following a stockmarket mini-crash, this must be it.

Share prices, especially in the US, had got entirely out of whack with reality. And they still are. Even after the current correction, the US S & P 500 is still an extraordinary 37 per cent higher than just two years ago.

Now, what in your life has gone up 37 per cent over the past two years? Perhaps your power or childcare bills, but that’s about it. Americans’ wages have practically gone sideways too.

Even in Australia by the end of yesterday’s “bloodbath”, share prices — represented by the benchmark ASX 200 index — are on track to be almost 20 per cent higher than in February 2016.

Economists have tried to explain soaring share values by pointing to Donald Trump’s large corporate tax cuts or invoking the imminent productivity boom from digital technology.

There’s no doubt slashing the corporate rate in the US from 35 per cent to 21 per cent has ratcheted up the price of shares (because the dividend streams they represent are worth more).

But the major culprits for this rollercoaster are central banks in the US and Europe and what they did long before Trump was elected. Central banks have pumped trillions into financial markets for years, and in recent months the biggest of them all, the Federal Reserve in Washington DC, has made it clear it’s slowly turning off the tap. It seems inflation and even wages in the world’s biggest economy are starting to rise. This reversal in prices was inevitable, once the “quantitative easing” funny money started to recede.

While Australia stuck to conventional central-banking thinking, it won’t be spared; the decline in house prices could accelerate as equity prices fall.

Just as a US Treasury bond pays a regular coupon, so does a house in Melbourne: it’s called rent. If the rise in US bond and share prices has pumped up house prices globally, they too might start to fall in sympathy.

There’s a silver lining. Lower-income workers and younger people have seen a huge loss in relative wealth in the past decade. If this fall in share prices avoids an outright rout, it could be a blessing in disguise.

Even if prices do walk off a cliff, remember they dropped more than 25 per cent in a day in 1987 without major effects on the economy.