In the midst of the instability that has marked Donald Trump’s presidency, there was always one bright spot: the economy. As long as the American economy continued to flourish, the president’s critics could tut their disapproval, but Trump’s chances of reelection appeared excellent.

But now the stock market has fallen 8% in December alone, hitting voters directly in the pocket books. Major indexes have sunk, a result of the trade war with China, political uncertainty, and rising interest rates. Are we headed for a recession, or is this just a bump in the road? I asked two experts for their opinions.

Stephen Ciccone, associate professor of finance, University of New Hampshire

Jay Ritter, Eminent Scholar, Department of Finance, University of Florida

Why have the stock markets fallen so rapidly over the last few months?

Ciccone: The main driver is interest rates. Rising interest rates typically lower the prices of stocks and cause bond prices to fall. Interest rates have been close to zero for a while, so there’s really only one direction they could go. There’s probably also some fear of slowing global growth, especially in China, and a lot of uncertainty about global growth in general.

Ritter: There are several reasons for declining stock prices. One is fear of a recession, which would hurt corporate profits in the short run. A US-China trade war, or more generally a decrease in international trade, might cause a recession. Second, the Federal Reserve is increasing interest rates.

So is President Trump right when he criticizes the Fed for raising interest rates?

Ciccone: I think he has a point. The Fed increasing rates will definitely push down the stock market. President Obama benefited from coming in right after the financial crisis period and the stock market had a huge rebound in a very low interest rate environment. [The Fed] is afraid that the economy is doing too well, and that’s typically when you would start increasing interest rates. Job reports are good. The general consumer sentiment, although it’s decreased a little bit recently, has been very high. So you have to hit the brakes on the economy by increasing interest rates. But whether or not they should do that, it’s hard to say. I personally think they’re probably increasing a little bit too much. So I think this market reaction is perhaps a signal that the market is kind of wary of those increases.

Ritter: Higher short-term interest rates do impact the housing market. But the Fed has various tradeoffs. We’ve had a long period of very low interest rates, which have harmed savers and retired people who depend on interest income for their income. We’ve had very low unemployment recently. And so one Fed viewpoint is if we’re going to raise interest rates at some point, this is a good time to do it. Having said that, the financial press tends to overemphasize the ability of the Fed to control interest rates. Inflation-adjusted interest rates, real interest rates, have been low around the world for many years.

You mentioned China. Can you give us an idea of how the trade war is hurting the US economy?

Ciccone: I think it’s probably going to hurt China more because China is more of an export nation. We are too, don’t get me wrong, but the trade war would hurt China more than the US. I think there’s this fear that there’s a potential for slowing growth in China. They had a hot economy over the last 15 years, so if it’s starting to slow down, then that could be a signal that, internationally, growth isn’t going to be as great.

Ritter: International trade is a win-win situation. It’s not a zero-sum game. American consumers benefit from cheap toys and cheap clothes. But actually most of the clothes [Americans buy] get imported from countries with even lower wage rates than China. The ability to buy those goods at low prices boosts the standard of living of all Americans and Americans benefit from the ability to sell [goods] around the world. It’s not as if every time somebody loses, another country gains.

Is there anything that indicates that we’re headed to a recession? Or is there just a general fear among investors?

Ritter: There are some indications. A slowdown or even decline in housing prices are partly due to higher interest rates, and a number of measures of consumer confidence and business confidence have declined a little bit. So the fears of a recession have increased, but there have been many false alarms before. This doesn’t mean that a recession is imminent.

Ciccone: Hard to say. If I had to guess, I would say the fears may be a little bit overblown. I think there’s a lot going on right now. You have protests in France, the trade wars in China, and Russia obviously is under a lot of scrutiny. Brazil’s economy has slowed down a lot in recent years. There are a lot of things going on at once that are creating this huge uncertainty. I do think [the stock market decline] is a little bit overblown and now is a pretty good buying time. Once things have calmed down in 2019 or 2020, I expect prices to rebound pretty quickly.

Is there any reason to be optimistic? What might make things better next year?

Ciccone: I think once the uncertainty is resolved, things will get better. Stock markets hate uncertainty.

Ritter: Yes. The general trend around the world is up. For instance, India and China have been increasing their standards of living very rapidly, but the US and Norway and Israel, also have very high standards of living, which continue to increase as a result of gradual improvements in science and engineering. Things are looking up.

(Originally featured in Mishpacha, Issue 741)