The Wall Street Journal reports,''the sudden, sharp drop in stocks is nothing to worry about. Yet''.
''It has been a perilous time for markets. Trouble in emerging markets, a spate of soft economic reports and the Federal Reserve's decision to keep paring back bond purchases have set nerves on edge. In the past two weeks, the S&P 500 has fallen about 5%. Not since late 2012 has it fallen so far in so short a time''.
Even so, the selloff has only taken the S&P to late-October levels. Given the scope of last year's rally, and the pricey valuations it took stocks to, the drop may be no more than a welcome reality check for a market that got too exuberant. Even so, another leg lower might set the Fed on edge. Notwithstanding the late economist Paul Samuelson's oft-repeated joke that the stock market "has called nine of the last five recessions," when stocks swoon, it's hard not to worry that the economy may follow suit.
Historically, the stock market has acted as an early warning system—albeit, an imperfect one—for the economy, often picking up on changes in the environment earlier than many other indicators. But while the line of causality mostly runs from the economy to stocks, there is also a feedback loop from stocks to the economy. If people's retirement portfolios are suddenly worth less, for example, they are likely to be more cautious about spending.
When the stock market falls, its implied discount rate rises. In response, companies may then apply steeper discount rates internally, placing higher hurdles on plans to hire and expand. And the economy suffers as a result.
