Three Questions: Prof. Andrew Metrick on the Stock Market and the Economy

It’s been a dizzying week on Wall Street. After positive economic news prompted fears of rising interest rates, the Dow Jones Industrial Average fell 1,100 points, or 4.6%, in a single day after rising more than 40% since the 2016 presidential election. The selloff quickly spread to markets in Asia and Europe, and prompted worries that that the long bull market that began in 2009 had come to a close. We asked Yale SOM’s Andrew Metrick if the volatile stock market also means trouble for the broader economy.

When does a stock-market drop become something that poses a broader risk to the financial system?

In general, it’s good to remember the motto of Paul Krugman (Yale College ’74, incidentally): “The stock market is not the economy.” The stock market can fall a lot before we have to worry about broader risks to financial stability. We are nowhere near having to worry. Even if the market gave back all the gains from 2017 (another 25%), I would not be worried.

What should regulators be watching for as volatility increases?

Regulators need to pay more attention to the bond market than to the stock market. If seemingly “safe” bonds start to look risky, then we can have a problem. Risky things—like stocks—can be very volatile without troubling regulators.
Are you surprised that the current downturn has been so global? Why do you think that is?
The major stock markets tend to move together. Companies and macroeconomic risk are global, and big stock-market moves in the United States tend to go along with big moves in Europe and Asia, no matter which one moves first.

Janet L. Yellen Professor of Finance and Management