Stock Market Slumps: Set for Another Crash?

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All three major US indices saw a slump of as much as 2% last week. Is a stock market crash on the horizon?

Are recent stock market slumps a sign of things to come? Image credit: Svilen Milev.

U.S. Economy in 2012

Despite an alarming 2% drop during the course of the last trading week, markets closed at a slight increase.

The S&P 500 rose by 2.34 points to 1,379.85; the Dow Jones by 4.07 points to 12,815.

Whilst growth is reassuring, the rises equate to a mere 0.17% and 0.03% respectively, marking an uncertain period ahead, with many traders unsure whether the erratic behaviour of the market will continue when it opens today.

What is Causing the Slump?

With Indices some way off the high points of 2012 so far, this gradual decline is showing a marked difference to historical post-election economic behaviour.

Typically, the re-election of an incumbent president sees a significant boost to the economy yet, despite a slight peak on the day Obama was re-appointed, the trend has not yet been established this year.

Fears of the so-called fiscal cliff that is set for January 2013 are mounting, and will begin to affect both corporate and individual spending patterns unless Obama’s government can agree to put a new budget in place before the end of 2012. As the date of imminent tax increases and public spending cuts inches nearer, the slowing of the US markets may very well be a reflection of investor uncertainty regarding the broader economic picture of the impending few months.

‘Double-Dip Recession’ On the Horizon?

Earlier in the year, experts warned that a market crash was imminent, with some predicting a slump of the same magnitude as in 2008. Thus far, however, market figures are a far cry from the low points seen early in the recession. The worldwide financial crises of 2008 saw all major markets go on to slump to unprecedented lows, with the Dow Jones dipping to under 7,000 points, and the S&P 500 to below 700, in 2009.

Since those spectacular crashes, extensive measures have been put in place to help the struggling economy. Quantitive Easing, which is still ongoing, has helped to prevent further slumps of the same magnitude, and is in place as an intended safeguard, preventing spending dipping so dramatically any time in the near future.

2012 Economy: What Happens Next?

As is to be expected following an event of such economic importance as a presidential election, political decisions could now hold the key to restoring economic stability. With the issue of the fiscal cliff still unresolved, billions of dollars worth of tax hikes and spending cuts could cause potentially disastrous ripples throughout the financial world. A stock market crash is not inevitable, however. If Washington can convince investors to trust its plans for economic stability, confidence in future investments can be restored.

Additional Resources:

Reuters. US Stock Index Futures Signal Mixed Open. (2012). Accessed November 12, 2012.

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