What’s Ahead for the Stock Market?
CAS economist Laurence Kotlikoff predicts continuing drop
Last Thursday’s and Friday’s collapse in stock values likely began a long-term swoon in the market, BU economist Laurence Kotlikoff predicts. Photo by AP/Richard Drew
One year ago, BU economist Laurence Kotlikoff forecast a coming stock market crash, brought on, he said, by a president whose policies, including a threatened trade war, could spook investors.
Last week, President Trump imposed tariffs on steel, aluminum, and Chinese imports—and Wall Street tanked. The Dow Jones Industrial Average shed 1,100 points on Thursday and Friday, closing at its lowest point since November, after setting a record high just this past January. That put the Dow officially in a correction, having lost at least 10 percent since that January record. The markets rebounded yesterday, with the Dow making up more than half the Thursday and Friday losses.
The other major stock indices—the tech-heavy NASDAQ and the broader S&P 500—also tumbled.
Kotlikoff, a William Fairfield Warren Distinguished Professor and College of Arts & Sciences economics professor, who last year said he’d sold all of his stocks, seemed a contrarian then, as analysts forecast a bull market from Trump’s promised pro-business policies. Still, he had been named by The Economist as one of the globe’s most influential economics experts, and he operates an online investment planner (free for BU employees).
After last week’s stomach-churning stock fall, Kotlikoff says that older workers counting on the market for their golden years should take heed: “If you are in or near retirement, long-term Treasury Inflation-Indexed Securities (TIPS) are worth considering as investments. If you hold them to maturity, you’ll receive a one percent real (inflation-adjusted) return. That beats losing your shirt in the stock market.”
BU Today asked Kotlikoff for his take on what’s happening on Wall Street now.
BU Today: Media reports blame last week’s plunge on Trump’s tariffs and fears of a trade war. Do you agree that’s the cause?
Kotlikoff: Absolutely. President Trump is plunging our country into a potentially massive trade war that would badly hurt our economy, threaten our jobs, and lower our living standards. If the president has a case that the rest of the world is trading unfairly with our country, he needs to present it to the World Trade Organization and let them adjudicate.
But unilaterally enacting tariffs on steel, aluminum, and now many Chinese products, and effectively calling our trading partners “cheaters and thieves” and egging them on with claims of “We can win a trade war,” is pouring fuel on the fire. There are no winners in trade wars when the opponents are evenly balanced. Our economy represents 15 percent of world GDP, but that’s far too small a share for us to dictate world terms of trade.
You predicted a coming market crash a year ago, pre-tariffs, in part because the market seemed overvalued by historical standards. Might the market’s drop be a classic correction that would have happened anyway?
I predicted the market would drop, in part because it seemed historically overvalued, and in part, due to Trump’s likely imposition of tariffs. His declaration of trade war is likely the last straw to fall on this bull market’s back.
Trump’s deregulation and corporate tax cuts were supposed to buoy the economy. Might those policies revive the Dow?
Those policies are already priced in the market. They won’t move the needle unless the economy’s response to those policies is stronger than expected.
What should people who own stocks do now?
I think the market could fall 30 to 50 percent over the next year. Personally, I’d reduce my holdings of stocks significantly and do so quickly. Economists don’t usually make such recommendations. But our president is, frankly, acting like a Russian agent.
If stocks continue tanking, will that have spillover effects elsewhere in the economy?
Yes, if stocks plunge enough, it will reduce consumer confidence, spending, and investment and usher in a recession.
Following up on the previous question, if someone has been planning a major purchase—a home, say—should they hold off?
Yes. If the economy fails, they could lose their jobs and not be able to make their mortgage payments. Also, house prices would drop, making this a bad time to buy.
If the market rallies this week, as it did yesterday, does that mean it’s out of the woods?
No. What’s happened has put a scare into the market, which will be there for a long time, setting it up for a major adjustment.
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