Wall Street is set to dominate the news in the final months of 2018. It is, unfortunately, due to some very negative news. After a 5.2% drop in the S&P500 over the course of two days in the second week of October that continued into the following week, it appears investors are losing confidence in technology companies. Whether a long expected correction as characterized by President Donald Trump, a return to volatility and recession, or a temporary blip, the news is unnerving. The Great Recession of 2008-2009 and the lengthy recovery was, after all, largely defined by a highly volatile stock market that routinely experienced massive swings over the course of hours and days. With the potential for destabilizing volatility returning, fears of a recession will be on the rise, which may well be a greater risk to the economy than falling stocks.
Although the Great Recession began with a subprime mortgage meltdown, the chaos quickly spread to the broader financial services sector. Due to a lack of liquidity, the rest of the economy soon fell victim to the toxic lending practices of US banks. Originating in the tech sector, today’s threat may not be as apocalyptic as the Great Recession, but unfolding events are just as unsettling. For the professionals of the financial services sector, the Great Recession was a time of great stress and uncertainty that tested their ability to cope with an unpredictable stock market. It was a time when investors and businesses walked a fine line between earning a fortune at the expense of others and bankruptcy. For the rest of the country, it was a time of great insecurity defined by a lack of control over one’s financial wellbeing future. Not only did people lose their life savings and jobs during the Great Recession, many lost their businesses and homes. Younger Americans lost untold opportunities to achieve their American dream.
While select groups have regained their losses and then some, a great number of Americans have still not recovered from the Great Recession. From the financial fallout of the Great Recession to the emotional impact, the American People were traumatized as individuals and as a culture. Given the Great Recession was a global recession, the same can likely be said about the rest of the world’s population. When people are traumatized, there are a great number of issues that they experience. When facing similar situations as those that resulted in their trauma, the traumatized will often experience anxiety, which is normal in any stressful situation. In a state of duress due to the inability to cope with stressful situations, people are traumatized, because their coping mechanisms are overwhelmed. The traumatized essentially have their coping mechanisms, which allow them to deal with stressful situations, stripped away. They need to learn or relearn how to cope with the stress of their traumatizing circumstances. Events like the return of stock market volatility will show whether or not Americans have learned to cope with the stress of economic uncertainty.
Unfortunately, psychology matters as much as economics when it comes to stock market performance while stock performance determines the capacity of businesses to raise the funds needed to operate and spend. Investors and analysts can use economic outlooks and financial data to help them gain the perspective needed to understand how a stock should perform, but they must anticipate how people will react to unfolding events and market conditions in order to predict the day to day trajectory of stocks. For professionals in the financial services sector, the ability to intellectualize stressful economic conditions affords them a sense of control, so they can strategically work their way through economic rough patches. The problem is that they are beholden to nonprofessionals who often react based on their instincts and emotions. They also tend to act strategically based on the reactions and emotions of nonprofessionals, i.e. they chase sinking stocks. A psychologically fragile investor pool in an era of economic uncertainty can, therefore, be a major threat capable of sending the entire US and global economy into a free fall.
With that in mind, establishing a sense of control is very important to those who are traumatized. Whether it is an intentional attempt to overcome trauma or a trauma-instilled instinct, the traumatized will try to seize control over their lives in stressful situations. As a traumatized culture, the American People sought out ways to punish Wall Street in the aftermath of the Great Recession. The Dodd-Frank Wall Street Reform and Consumer Protection Act is an example of a more constructive effort to both reign in toxic banking practices and empower traumatized consumers. Regrettably, the Trump Administration, under the influence of far-Right Wing, libertarian special interests groups, has sought to dismantle Obama-era economic protections. Trump’s head of the Consumer Financial Protection Bureau, Mick Mulvaney, is both reluctant to enforce provisions of Dodd-Frank and a friend of the banking industry. Donald Trump is, however, someone who radically shifts his positions based on what he feels is most advantageous to him. Culturally traumatized, the American People can only be expected to react to negative stock performance with anxiety, fear, and anger. This could, in turn, compel the Trump Administration to give Americans the control and security they need by twitching gears in favor of increased enforcement of key regulations.
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