Falling US shares tell us only that investors were too excited in January

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If you were the incoming or retiring chairman of the Federal Reserve, you might be quietly pleased to see stock markets plunge on the day of the handover. As Jerome Powell was sworn in on Monday to succeed Dr Janet Yellen as head of America’s central bank, the Dow Jones index of leading US stocks was falling by a one-day record of 1,175 points, with Asian, European and London markets following overnight.

But this wiping out of recent gains does not reflect badly on Yellen, whose steady hand leaves behind US inflation at just 2 per cent, unemployment barely above 4 per cent and a strongly recapitalised banking system. Nor does it indicate any radical shift to be expected from ‘Jay’ Powell, a lawyer-turned-banker who was widely seen as the most sensible ‘continuity’ choice Donald Trump could have made for the Fed, short of awarding Yellen the second term she would very much have liked.

What it does reflect is the over-exuberance of investors who piled into equities in January, driving the Dow from 24,800 to 26,600 and creating seriously out-of-whack price-earnings multiples; worry that full employment will lead to an upsurge in wage-led inflation; certainty that interest rates will rise this year but may have to do so faster if inflation does revive; and rising fear of what higher rates will do to over-borrowed companies and consumers.

These are all real concerns, especially the incipient debt problems. But the only new factor has been the steepness of the share-price rise since the beginning of the year. Hence most US pundits described this week’s fall as a ‘correction’ that was widely foreseen and probably overdue, rather than the beginning of a crash to match 2008. Some even saw it as a buying opportunity, and we might wonder whether that includes whoever manages the Trump family’s investment portfolio these days.Only a month ago, the President was claiming the strength of the 2017 stock market and January’s ‘record fastest 1,000 point move in history’ (though in fact it wasn’t), as both a by-product and an endorsement of his achievements in office. But if the correction turns into a more sustained wave of selling, will the President send his man into the exchange —emulating the Wall Street aristocrat Richard Whitney on 29 October 1928 — to bid up blue-chip stocks against the storm tide? Somehow I doubt it.