The stock market took another hit yesterday, dropping 1,000+ points, much of which came late in the session as program selling kicked in. The market may drop further or it may rebound, but an otherwise calm eight-plus-years (Obama) has now devolved into volatility. And how could it not? Markets hate uncertainty, and now the chaos and ineptitude of the Trump Clown Posse has belatedly infected Wall Street.
Part of the problem stems from Trump’s recent replacement of Fed Chair Janet Yellen with Jerome Powell. Yellen was a steadfast and thoughtful steward who kept rates low despite increasing pressure from wealthy lobbyists to raise them. Higher rates tend to help billionaires by increasing their investment income (and billionaires don’t often need to borrow money), but low rates are appropriate when the economy still has some weakness. Powell, who has a background in private equity and money management, is thought to be a centrist, and may govern much like Yellen, but nobody really knows. We do know that he is one of the few Fed Chairs in modern history without a degree in Economics.
Another part of the problem stems from wage growth. From Jan ’17 to Jan ’18 wages grew 2.9%, which is the most year-over-year growth since the great recession. This growth may be short-lived or it may be part of an accelerating trend, but the markets are lately fearful it’s the latter. Ideally wages should steadily rise, but a large increase (like 2.9%) might indicate the economy is growing so quickly that inflation will become a problem. If the Fed thinks the economy is too hot, they will raise interest rates to try to moderate growth, which often mean a weaker stock market. Higher rates translate into higher borrowing costs for businesses, hurting their bottom line. And higher interest rates on bonds make them relatively more attractive to investors, meaning stocks become relatively less attractive. In other words, the demand for stocks tends to go down when the demand for bonds goes up.
The final part of the problem stems from the GOP Tax Scam. Wall Street Traders initially thought Tax reform would stimulate the economy, so when wage growth jumped, they worried that Tax reform would worsen an already overheating economy. But in the past few days some traders started wondering if the Tax Scam will really have much of an impact on growth. Most of the tax gains go to the wealthy, who tend to hoard gains rather than spend them. And the average workers who recently received one-time bonuses may not see meaningful wage growth in ’18. It’s too early to tell. Meanwhile, gas prices are higher, credit is more expensive, and health care costs continue to soar, all of which will hurt the average pocketbook. Will tax gains outweigh higher costs?
These forces have brought about the sudden uncertainty and caution we are seeing on Wall Street. So far, the scenario seems more like a typical bull-market correction than the start of a bear market. Stocks have come a long way in nine years, so a correction is overdue. But the future of the market will hinge on three factors. Will Powell steer the Fed like Yellen? Will wage growth continue? Will the Tax Scam bring meaningful increases in income to average Americans. The first two questions are anybody’s guess, but the third question has been tested in past decades and the answer seems to be, “no, this tax reform will not spur the economy because stimulus was never its design.” It was designed to simply transfer wealth from the middle to the top.