The overall trend is the same that was started by Obama after the recession - it is steady and longterm, it continues to create more jobs and a growth rate of about 2-2 ½ %. Trump's tax cuts added money, real and prospective, that was available for investors to buy more stock increasing the value of the stock market, reflected in a faster growing GDP.
So what is the problem? The tax cut has not been paid for. As can be seen at the bea.gov tables corporate income tax is down $150 billion in the same period. Trump's next idea to pay for the tax cuts for the wealthy is to take from the well financed SS and Medicare Trust Funds. That, however, will lead to an outcry from all those millions of Americans who basically exist on money from these two funds, which by the way the owners have paid for through deductions from their salaries during their whole life. GW Bush tried to take this money but had to reverse himself. Trump is probably not smart enough to step back from an untenable position.
An example: in northern Maine, part of the 2nd Congressional district, 35-40 % live on their SS and Medicare trust money and some other programs as well. . I hope that the voters realise that this is taking place in front of their eyes while they go to rallies to cheer on T. to destroy the American economy.
4
I contend that we are in or at the beginning of a recession. Consumers are not buying big ticket items unless necessary right now. Notice all the discounted prices and cut rate financing at the beginning of the model year on popular brands and models of cars and trucks? Notice the decline in sale prices for housing in many previously red hot markets? Notice the decline in year over year sales of retailer after retailer? Note that the only way Apple was able to grow the iPhone was by driving up the average selling price?
Out on Main Street, prices are steadily rising and wages have been stagnant in terms of buying power for many years.
Take a look at consumer debt.
Recessions are always easier to see in retrospect, but I think we are in one and the stock market is due a sharp correction.
2
“This is a buying opportunity” as the Gujurati guys that I used to work with would tell me. They were all excellent at making money on the side. They had their pay from our work together, then they also had Dunkin Donuts franchises, large convenience stores and of course they sent their wives out to work.
I’m taking their advice. I’m trying to decide whether to add to my positions in BA, LMT, MO or AMZN.
The stock market is based almost entirely on computer-based trading of stocks as a function of very small (pennies per share) discrepancies in share prices. Individual investors, even in aggregate, simply do not have the power ( read $$) to have an effect.
Its all about momentum, either up or down. And when the share price increases stop, and they will, you better hope you too can find a willing buyer.
1
This is very reassuring. Too bad I don't get explanations from my financial advisor—my financial salesman, I should say. Don't believe that a financial advisor feels "fiduciary duty." As one investment firm commonly markets itself, "You are in charge."
3
"...the Trump administration, the tax cuts, was an unquestionable boon for stocks..."
It certainly is questionable. Since the tax cuts were actually in effect the market is essentially flat. Considering the additional debt that is the result of the cuts, with the increase pressure on inflation and interest rates, the most you could say at this point is the tax cuts offset its negative effects. Hardly glowing praise.
5
The reason why the market falls when interest rates rise is that the market is discounted for Present Value. PV = FV(1+r)t. So as r or rates goes up, the Present Vakue declines. FV is for future value. So if the Fed keeps raising rates, stocks and bonds compete and if you can safely earn more from fixed income investment , stocks decline. Stocks will go down about fifteen percent with four more rate hikes as planned by the Fed. Most likely the Fed will not raise rates as they previously stated. For in effect they will cause a recession.
2
Good points but I would be interested in who is selling and buying. I bet it is large organizations mostly and then by emotions individuals. Rotation to bonds is real as rates are normalized, but buying long term and not holding is dangerous. I agree that reducing China and increasing the US will be a positive, not just so much by paying more but by employing more at decent wages. Rotate good employees from fast food to manufacturing while training a larger work force would be great.
3
Increasing interest rates also mean that interest rates on auto loans, home mortgages, and credit cards also rise, potentially mitigating wage increases from a tight labor market. It will be interesting to see if workers come out better off.
8
@Randy
Individuals with fixed-rate mortgages (rather than adjustable rate mortgages) experience greater funds for purposes other than housing when inflation occurs, assuming that their wages are increasing with inflation.
1
@5barris It hass been a half century since wages increased with or did better than inflation.
3
@Randy Eliminate your credit card carrying, don't borrow for your car, and only get the home you need not the one you want. Then save after eliminating debt. That will eventually improve your life a lot.
9
At the moment I am grateful that I decided to wait for a downturn or crash before adding to my investments. To the extent that this downturn represents a reaction to higher interest rates, then the markets are overreacting. We still have historically low interest rates and will for a long time to come.
2
@Barbara
Quite the opposite. With historically low interest rates they are likely to continue to rise which may further depress stock prices. Stock prices are well known to be indirectly correlated with interest rates. Don't be surprised to see continued stock price weakness.
7
A simpler explanation is the increase in oil prices. If you go back to 2014 and graph the downturn in either WTI or Brent crude, you find a negative correlation that carries forward. Same with the current increase in the price of oil. It takes energy to do everything and our economy is built on cheap oil energy. Higher oil prices = greater cost of production = lower profits = downturn in the stock market.
2
Really??
The stock market was artificially inflated when companies used the cash from the big tax cut to buy back stock instead of expand their business (what was originally touted as the expected result of the corporate taxcut {wink, wink}). Fewer shares (suddenly) = higher price / share. Duh!
https://www.nytimes.com/2018/04/30/business/the-tax-cut-buybacks-busines...
https://www.nytimes.com/2018/02/26/business/tax-cuts-share-buybacks-corp...
And people said, "Wow, look at the stock market: The economy is doing great!" So that helped pull the market up, too--a kind of multiplier effect. But, it was a bunch of smoke and mirrors; the effect is wearing off; and it was time to face reality.
Meanwhile, we have stopped caring about whether companies establish monopolies; so instead of competition and innovation, we have the infrequent new idea which is gobbled up by one of the multinational corporations, particularly in the tech sector--good for the stock market, not so much for the economy, ultimately.
In the long term, the strength of the stock market is usually a reflection of the strength and health (or lack thereof) of the economy; but sometimes the stock market veers off on its own course as a vehicle for complex legalized gambling.
24
I don't quite understand Neil's conclusion that it's good for workers when "input costs are rising" since "the wages you receive are one of those costs."
Based on my limited economic knowledge, one of easiest ways to "support the bottom lines of the largest companies" (meaning the shareholders value) is to reduce "input costs", starting with wages and employees. As costs go up, companies generally lay-off workers to cut costs and maintain their bottom line. How is this "good" for workers?
What I expect to see over the next 2 years will be companies laying off workers, unemployment increasing, consumer growth slowing and economic growth declining to nothing.
So, Neil, perhaps you can explain in exactly what you meant another column. Or perhaps another reader can educate me.
13
@Little Pink Houses, he means that for now, wages are rising, meaning companies are indeed doling out raises to retain employees. As long as their revenues support it, they'll pay the bill. It may not last, especially if companies think a recession might be coming. One of the first actions they take is to lay off people to preserve profits.
1
@Little Pink Houses That only works when your sales don't go down without the workers. Now automation is a better view as to why you won't be getting a lot more money. Also good management does not pay more just to do so, it must have value today.
The market actually works! What a concept! That the average American (and our "Dear Leader") don't understand that is a pity.
2
The economy was artificially overheated by the Trump tax giveaway to corporations, heavily increasing the deficit; combined with very low interest rates which were still operating in recovery mode after the last crash, a nasty downturn is the inevitable result. For now, workers are seeing modest increases in wages which still are not level with inflation, however. The imbalance Trump created in the pace of the US economy recovery compared with the rest of the world's, created the high dollar, therefore creating debt repayment difficulties for struggling economies abroad. The US Market is now in a rolling recession - not what one would call a "re-set" - and when the inflation caused by this overheated economy kicks in before too long, any wage gains will swiftly be negated. The author says the tariffs haven't had much of an effect yet - and yet they have, on Market sentiment here and abroad. Also, they are affecting the Chinese economy in tangible ways, as well as the steel (impacted) sectors, and farming sectors, in the U.S. The writer is wearing rose-colored glasses.
20
Very insightful article linking interest rates to stock prices. But there is still a discrepancy between the interest rate of 3.13% and the earnings/price ratio of 5.23%. That difference reflects the expected growth in earnings. If expected growth is about 2.00%, the numbers match-up quite nicely. [All of this is linked to something called the "Gordon Growth Model.]
And a correction. The article states that "Those three factors together were enough to propel the Standard & Poor’s 500 up more than 300 percent..." True, $1 in the S&P 500 ten years ago would now be worth $3, but that is only a 200% increase. Still not half-bad!
2
@Bob C.
Thank you, Bob. Most people still seem to miss the "increase" part of this and similar statements.
@Tom
Well, I believe that $1 invested when the SP500 was at a low of 667 would now be worth about $4 with the SP500 at about 2750 (leaving dividends aside). So isn't that about a 300% increase?
Yes the expansion moves to a phase. Not expanding and feeding on itself.
1
Well, "I expect it to fluctuate"...
The sugar high wore off and the kids fell asleep.
Probably another year before it's time to bury the money in the back yard.
Trader voice in my head wishes I had listened to it and cashed out on the last rally...
Probably prolonged churning to work off the excesses.
5
All I know is my 401k lost $30k+ this month. I changed my future contributions to a “stable vaue” fund. I have 3-6 years until retirement and will be a bit distraught if I lose as much as I did in 2008. As someone who’s never been able to wrap my head around he stock market, this article and explanation makes no sense to me. I need a dumbed down version. My wage is stagnant as I’m maxed out in my current salary band, so how all of this benefits employees is puzzling to me. I don’t work in an industry that organizes or has unions for its workers...although it should.
13
@Sonja If stocks are overvalued, it is good for people who sell them (or plan to sell them), but bad for people who buy them. When they stop being overvalued, it is good for people who buy them, including the workers investing part of their wage every month, even though it means the value of portfolios (including yours) go down. If you are close to retirement however, you don’t have much to buy left, and mostly have stuff to sell, so you are indeed at a loss.
If interest rates are rising because the Fed is reacting to rising inflation including wage inflation, this is good for workers because it means their wages will rise.
That’s the very simple version.
2
You don't have to pay taxes on the amount you put in a 401K. You should have the option to direct money into a money-market fund where it should maintain its value and make a small amount of interest. Figure out what you tax percentage is. When you retire, you'll have that amount of money with some interest. If you needed it immediately, you could take it out the first year you weren't working and not pay as much taxes on it.
1
My husband and I recently retired and within the past six months moved our deferred comp S&P Index Fund into a stable value fund. We have been feeling uneasy with the economy and felt much more comfortable protecting our savings. We are not economic geniuses, just regular former workers who lived simply, saved our money and created a nice nest egg for ourselves as a result.
2
Neil Irwin writes that, "the Trump administration made its signature domestic policy initiative a steep cut in corporate tax rates, which flows through directly into higher after-tax profits for shareholders."
He should point out that those profits go mostly to the 1% of the population that owns 83% of all the stock in the country.
Yes, big profit increases for the 1%, lousy we growth for everyone else. But that's what Trump and his minions wanted all along: big bucks for his fellow billionaires.
21
@Sean It's called "capitalism"! Those who invest in the stock market take risks and likewise should be rewarded. The Trump corporate tax cuts resulting in more corporate profits will hopefully be used in part to increase wages and also invest in corporate expansion, which will simulate the economy. The top 1% pay about 40% of the annual income taxes. It is only a question for those who begrudge the wealthy (many of whom live in Greenwich!), of whether or not they should pay a greater share of the total taxes. Maybe they should.
@adamar1
NO, adamar1....it's called GREED by the 1%.
1
I view it more as portfolio rebalancing. As stock prices escalated, I moved money from stocks to bonds to stay within my target asset allocation (sell high, buy low). So this might possibly be a cause of the recent stock market correction.
To the extent that corporations will use their tax windfall dollars to create new investments (which in theory will create jobs), long term profits will increase but we have to be patient. It takes many years between planning, designing and constructing for those investments to come to fruition. (I'm hopeful but not optimistic since most of the windfall goes to share buy backs, dividends, acquisitions or one time worker bonuses).
2
It's all relative Neil. While the economy is certainly out of the great recession starting in app. 2007, the slow moderate growth is basically a continuation of the Obama yrs.
Many short term and long term looming problems have not been addressed and will lead to a serious downturn. The only questions are when and how bad. They may be already starting.
1-Amassing of trillions of dollars of student debt. It is a long term albatross around these young people's neck.
2-The tremendous downsizing or outright loss of pensions. It is one of the reasons baby boomers are enjoying a nice retirement.
3-The continued weakening of unions to where they are all but non existent re meaning anything.
4-Widest pay divide between the have and have nots.
5-The amassing of trillions of dollars of deficits on the backs of the average tax payer with the corporate welfare tax cuts and insane military spending.
6-A frenzied war against immigrants who were always the backbone of economic growth in our country.
7-An insane (instead of a fair, targeted) trade war that will wreck this economy sooner of later.
I am sure I missed some but these are the ones that we have to face and that you should continue to address.
43
@Paul. In re your assertion #2: I am a baby boomer & we don’t get pensions. That was our parents’ generation. We got flipped into 401Ks, which are mostly invested in the stock market. This makes retirement a crap shoot rather than “nice.”
5
@Catherine Hudgins- Thank you for you reply. Yes, you correctly pointed out where I was wrong. Only some baby boomers enjoyed pensions, You are right, some were flipped into 401ks.
However that was better than nothing. Today's generation cannot afford 401ks.
@Paul The growth was to be 2% at best, now with a different view it should be 3% or more for a good while. Not something Obama thought was possible, in fact he said it was impossible. Impossible for him, possible for others.
1
While I certainly hope your analysis proves correct, the grim realities of what many of these jobs actually are for most Americans dominate the minds of most.
Most of us younger than 40 don’t have retirement savings that amount to anything substantial. We don’t have 401(k)s because our companies don’t offer them or because we are contract or temp employees. We have excessive debt, in terms of student and auto loans, credit cards, and if we’re lucky, mortgages. We don’t have much leverage when it comes to raises and promotions. We don’t have the power (union or otherwise) to disagree when our CEO takes home tens of millions in yearly salary.
The reckoning is still to come.
47
@Amber Petrovich If you have any debt other than a mortgage, eliminate it. Cut out everything not required until you both have no debt, have an emergency fund, and are saving. Then and only then can you return to somewhat consuming things you desire. Pretty simple, but it has a price.
2
@vulcanalex Great advise. However your assuming it a level playing field... which it is not.
Given our current leadership, and I use that term very loosely, the divide will only grow. This coming election maybe our last chance to start leveling the playing field. Over time we seem to have forgotten the concept of "The Common Good!"
2
Why do we ignore the obvious?
- HH Incomes outside of the top 10% are far too low and mostly stagnant over the past three decades.
- The vast Wealth/profit gains generated in that same span are practically all going to the top, crumbs to workers who contribute.
- Costs of living are out of control, especially housing, health care and health insurance, where the insurance premiums alone for a family are nearly $25-30k per person (and are a burden not only to households but to businesses as well).
- As a result, people have little to no bandwidth to increase their HH spending to drive economic gains
When will corporations and the wealthy learn that for themselves, 80% of a pie that’s say 150 billion large is better than 90% of a pie that’s 120 billion large?
25
@Joe Arena I couldn’t agree more. I think corporations are to blame for a lot of what’s going on in America today- even in politics. Special interests and lobbyists dominate. This isn’t good for the “people”. It’s good for those corporations. Aside from immigration, I think by encouraging massive student loans and getting very little wage growth over the past 30 years is killing us! The corporations need to give a fair wage. I’m sorry, but I know people w MBA’s that don’t make that much yet they have massive debt. I know we live in a capitalist society but if wage growth wasn’t so stagnant bc corporations are so greedy we might have a better climate overall. How are kids gonna buy houses w home, car and education prices sky high? Has anyone looked at what housing prices have done over the last 25 years? This is not good for the country. The middle class is shrinking. Not to mention, universities are still teaching the same old curriculum. There is a disconnect between our universities and corporations. Universities should be getting w these corporations and designing curriculums what they need, not jacking prices, teaching the same curriculum and squeezing our kids w massive debt.
1
Some useful observations ands explanations of what's happening right now, along with a little past performance. But, you've used typical financialese to either cover up things you don't like, or to hype performance you support. We little people would appreciate plain talk, even as we worry about our retirement savings.
10
The big risk factor needs highlighting--CLOs. Much like the mortgage-based bad debt sold in confusing bundles, these corporate junk bonds can fail just a badly as CDOs.
Maybe we can let some unstable corporations go belly up without a bail out to AIG or GoldmanSachs investors.
Regulation may have forced greater capitalization of these investment banks, but it left a loop hole for crazy risk taking that sinks all ships that the rising tide lifted for awhile.
Even a major market correction with rising interest rates means retirees will tighten up, young workers will stop spending, no one can afford a new home and a slide into recession is forecast in a year.
That Trump is jerking around with tariffs, impeding good business productivity and better wages is a travesty. His tax cuts simply added to the federal deficit--not paying for themselves at all.
Reckless bravado does not inspire market calm.
18
The stock market is dropping for the same reason that it always drops or rises beyond sensible, moving average price-earnings ratios. Speculators are flooding the exchanges with dated options, probably using borrowed shares. They are hoping thereby to drive prices down with sucker bait. They then hope to cover their option wish bargain[priced share and pocket the difference.
Sensible investors continue with their normal, rationally based pattern. That is to keep a pre-determined percentage of net worth in equities, with some leeway within a range. When prices rise pushing your stock holding % eyond that range, sell to bring things back in line. When prices drop putting that percentage below the prescribed range, buy. I have been doing that for years. It works like a charm, especially when holdings are well diversified. Boring is good!
8
Neil, you offer only a near term, perhaps glossy, view, as the longer term looks increasingly precarious.
The current strength is due largely to a healthy financial foundation developed since 2009-10, layered on top with massive stimulus from tax cuts and spending increases Republicans have used to buy the 2018 election.
But we know exactly how this story ends, and it isn’t rosy ... As deficits inevitably rise, so will interest rates and the dollar, both suppressing growth. Interest on credit card, student, and federal debt will begin to drag heavily. The effect will be a weak, likely declining, economy a la the early 1990s. The only solution will not just be higher fed rates but recapture of tax giveaways.
My hunch is these longer term risks became much more real - and closer - to stock investors when long interest rates spiked.
11
@Dsr Correct: we're on a sugar high pushed by the tax cuts that increase deficits in a tight economy, to be followed by overheating and contraction. Let's hope that the inevitable occurs before the 2020 election and then we can really clean out the stables. Unfortunately, Dems will still have to do the heavy shoveling, as always.
5
Real wage growth is down this year though. Items affected by trade sanctions have increased in price, not labor. And the higher bond yields are probably due to bigger deficits; the more you owe, the higher interest rate you will be charged for the next loan.
8
I'm not buying it. For the past 40 years those with capital have been hitting it out of the ballpark while labor has suffered. I see absolutely no fundamental change in this system. The number of monopolies has grown as Congress abandoned their oversight duties. Labor will never gain any power in the U.S. until Congress forces those with capital to change their ways. Dream on.
34
@June that’s why labor - we - have to gather and act as collective stakeholders. We need more power. The Govt and unions can’t do this for us anymore. Capitalism is out of control.
10
@June Of course capital is more valuable than unskilled labor, and that is only going to increase. Automation and what is called AI will be eliminating low skilled jobs by the millions. Even in China robots are replacing humans. We better educate and rotate our citizens into jobs they can do and are valuable.
@Amber Petrovich How might you get this "power"? Go on strike and live in the street? Your power is to learn a valuable skill and use it, or learn how to run a valuable small business. Capitalism is not out of control.
1
Rising long term bond yields do not necessarily reflect rising expectations of future growth in the economy.
In actual fact the Fed is working to bring growth under control because it states that the extremely low unemployment number is too low to be sustained.
As a result Chair Powell said rising short rates will raise long rates, so the rising long yields are actually a reflection of tightening monetary policy.
Stock market is falling because the cyclical growth prospects are
diminishing with rising interest rates and a tightening labor market.
Rising interest rates are not now reflecting expectations for faster cyclical growth, because the prospects for further cyclical increases in the growth rate are diminishing.
With rising interest rates and falling prospects for cyclical growth, stock prices are naturally falling, with no visibility for when this monetary tightening cycle will end.
stock market valuations are falling.
Fed feels that stock prices are currently "elevated."
6
Except that the stock market isn't anywhere near as logical as Irwin portrays it. It's value has far more to do with psychological and social affects and trendiness in thinking in particular.
8
Perhaps employers are paying more for workers, but a good deal of that is going towards medical insurance premiums instead of paychecks thanks to the US medical industrial complex.
14
The average person simply does not understand the complex trading strategies used by short-term institutional investors, even though their trading dominates the market.
Using hundreds of billions of dollars of cheap borrowed money, it is possible to make good returns in a predictable, one-way market. Sophisticated options strategies involving large baskets of stock produce furious buying and selling of both options and the underlying stocks. Just as long as you can borrow margin money under 2%, the rewards are greater than the risks. These traders ride along with the bull market, providing more than 50% of the daily volume and supplying plenty of liquidity.
Now what happens when things turn bad> Institutional traders are going to sell quickly and cut their losses. At the same time, the algorithms all go off at once, and huge piles of stock are automatically dumped.
Anyone who thinks the short-term market cares about politics or the economy is naive. It is just feeding off the tape, following the momentum and reacting to every rise, dip, and trend breach.
It is only after there have been substantial losses that actual long-term human investors wake up and react based on the real value of the future cash flows of the underlying companies. They are now a tiny minority in the trading universe.
26
Yes, perhaps the low unemployment rate will trigger an increase in salaries, but people have been expecting this for a year and still no movement. Perhaps it will happen now, but I'm not holding my breath.
To my mind, the current stock 'instability' is mostly due to rises in interest rates elsewhere. Why put all your money in stocks when you can get a decent return someplace more stable?
But the really big test of the market will come when companies stop spending ridiculous amounts on buying back their stocks. I read one place that's now the biggest money coming into the stock market! If that stops, and profit margins (already at absurd heights) don't go up, where will the stock market investment come from?
18
Our economy is good. But stock market is in trouble. Why? If the zero interest rate and QE (quantitative easing) can create the longest bull market, then the reverse of rising interest rate and QT (quantitative tightening) should be true as well. With consistent FED, I don't see the stock market situation will be reversed in the near future. With our president waging trade wars with various countries, I think the best move right now should be staying low and acting in defense. Even if the Democrats retake the congress, stock market will act according to FED and not congress.
8
So the fact that the market went up 400 today is bad for workers and the economy? On the business page of the NY Times any index is always taken as good news for the Trump economy. It is simply impossible to take seriously the claim that a radical drop in the market is good for ordinary people when we were told that the tax bill was good for ordinary people because a boom would enrichen our 401 K plans. You will just say anything and when the trade wars pull the economy down you will forget what you have said and say "I told you so"
13
@Greg Jones enrich our 401k plans, ha. What 401k plans? I’ve been on my own for retirement savings for a decade now.
2
I'd be glad to see these kinds of reports include a carbon audit. How much does a single new jobs report, a single percent growth in the economy, contribute to climate change?
Oh, right. You say economics is one thing, climate is another? You're part of the problem.
4
it's amusing to read articles like this. Why can't someone write "the market goes in cycles and always has; it's been up longer than almost any time in modern history so eventually it is going to go down, maybe this is that time."
Trying to assign "causes" and predict the extent is a fools game. The "experts" are just guessing even if they aren't aware of it, and some of them are bound to be right. Maybe this is a blip, maybe it is the start of a long decline, maybe we're at the edge of a cliff and slipping. Nobody really knows and while people keep astrologers, palm readers, and economists in business trying to predict the future the truth is none of these 3 groups know what is down the road.
27
@Mike T.
It averages 10% a year with a small random walk fluctuation around the average. I think what is interesting are the feedback loops. Like the FED, congress failing to act in 2008 and Lehman going bankrupt. We think of the stock market as independent of the labor market but fourth quarter layoffs are a short term strategy to boost year end profits and weak stock gains for share holders. This strategy works as long as everyone doesn’t act in unison and they rehire in January. I am interested to see if hiring is now weaker than average next quarter but above average for the first quarter of 2019.
2
@Mike T. Well there are indicators of future long term returns that are in the 70% plus range for accuracy, including CAPE, Earnings to GDP (Buffet's favorite) and a few others. So there is some level of understanding of where markets will go, but there hasn't been much progress on understanding or predicting short term movements.
1
@Mike T. Mike T. is correct. Unfortunately, most people don't understand this, or don't want to understand this. And, the fact that most people don't understand this or don't want to understand this, is what keeps the "financial advising" industry in business. If the newspapers really wanted to help "The People," Bloomberg, CNBC, Fox Business and the "markets" sections of all major newspapers, etc. would be replaced with words like what Mike T. is proposing... "the market goes in cycles and always has." I would add... "but, in general, it tends to go up over time" and... "so put your money in index funds, leave it there, and get on with your life." Unfortunately, these media companies rely on advertisements from financial advising firms... and those unwilling to learn simple investing basics on their own who hire and pay those firms... and that cycle continues and continues.
2
And all the while the congress is trying to reduce regulations on the financial industry, the bubble is building and inequality is soaring. We could have a national debt of 33 billion in 10 or 15 years (more than double that of now) and that will demand huge tax increases and major cuts in social security, medicare, medicaid. I wouldn't want to be somebody's grandchild or grandparent in the grand new world of trump, mcconnell and ryan.
12
The stock exchange is not the economy, but the concentration of wealth has become a threat to the economy. We need a strong middle class. I know this is the wrong audience, but we need working families with hope instead of fear. We do better when workers trust their employers and it is reciprocated. Encourage unions, raise minimum wage, make housing, and education affordable. That will strengthen the economy better than a small portion of the country squirreling away riches in tax havens will. Mr. Irwin, I believe you are wrong, because I expect layoffs this spring and a deep recession that will last several years. Housing is out of reach of most Americans now and owning a home was their largest asset at retirement. It is gone.
53
@Joe Barnett - I agree with the need for strong unions, better wages etc. That said, maybe seeing owning a home as the best retirement asset is misguided (though it has traditionally been the pattern). Homes cannot be spent. Many seniors find themselves with a nice house, but cash poor having a hard time buying food, personal care items, and paying medical co-pays. That also means that they don't have the funds to make necessary repairs as the place deteriorates over time. "Reverse mortgages" are one answer, but that is essentially borrowing back the value of their homes and paying interest in the bargain.
Other folks found themselves during the recent recession with houses worth less than they owed with no equity to make use of even after years of making mortgage payments.
It must be lovely to own a home and to have sufficient funds to have a nice retirement, but for too many the home they saw as their security becomes their trap as they age.
11
@Anne-Marie Hislop I know of several people in this trap and am trying to avoid it for my wife and myself. One thing is the realization that it's better to downsize before you have to rather than discover it's urgent. Nothing good happens when you're in a hurry.
2
@Joe Barnett
I don't think this is the wrong audience for your comment at all. More people I think would agree that "we need a strong middle class" than not. Most who would disagree, probably wouldn't subscribe to the (left of center) Times.
5
There is an assumption here that wages will rise but based on what? The only movement we've seen to raise wages at the low end are local or state initiatives that mandate a higher minimum wage. Most of these laws will take years to be fully implemented.
Absent organized workers -- of which there are fewer now that the Republicans and a conservative judiciary have taken measures to gut unions -- and higher taxes on top earners to control their greed, where is pressure for higher wages going to come from? Labor shortages don't even matter anymore as automation is increasingly make human labor a less important part of production.
We had steady wage growth in the 20th century because we had a real progressive income tax structure and strong unions to fight for workers. The bottom line is that markets don't affect wages, political action does.
52
I wish this specific point made in the article was made more often: buying a stock is buying corporate profits. When stock prices decline because it costs less to buy the same corporate profits, it is bad for the sellers, but it is good for the buyers, especially those with little assets (hence losing little money) but who still need to buy most of their retirement pot (winning a lot on their future purchases). Typically young people entering the job market.
Rising interest rates means exactly this: it costs less to buy the same amount of future returns. It makes a lot of indicators turn red, but this is very good for many. Unfortunately there is no real measure for this benefit.
It has the same positive effect on housing: buying property is like buying the future right to not pay rent. When interest rates rise (and hence expected returns rise) you have to pay less to get the same benefit of not paying rent.
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Hate to say it, but post the blue wave on Nov. 6, Mueller will be unleashed. Trump is most likely on his way to jail. How this affects the USA economy is uncertain, but I have to guess the turmoil will cause a short-term stock market crash. However, the collective sigh of relief should lead to a robust rebound.
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@GP Sadly, no jail. Complicit Senate won't convict no matter what his crime.
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@GP
blue wave? don't hold your breath...trump fits america like a glove...
The market and the Fed send messages to each other.
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Wonder what the cumulative debt burden is for stock market corporations and how that graphs over time? What is the rate increase recently? Seems that the known ability to "hide" debt favors continuing borrowing. Does the emergence of "collateralized debt obligation" instruments suggest that corporate debt is problematic?
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@george - Look at https://tradingeconomics.com/united-states/private-debt-to-gdp
Set the time interval to 10 years and look at the alarming arise since 2013.
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@george - You are mixing up a lot of important topics. Leveraged loans are a very different thing from revolvers tied to the LIBOR. Of course, the largest companies with the best credit can just issue commercial paper.
In any case, you can read all about them in the 10-K filings.
All is well. Remain calm. This is part of the recovery from the sugar rush which was created by last year's idiotic tax cut for the rich.
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It really seemed to me that the shift in bull market psychology was triggered by the tax cut. Immediately afterwards investors kind of woke up and started worrying about over-stimulation and the Fed needing to raise rates. Kind of ironic, if true, given the party that pushed through the cut.
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Hogwash! This is a great time for investors. Just look at the long term returns of equities - about 10%. It’s also a great time for workers if they are educated and trained in new technologies. The old economy is gone and the time when anyone could get a high paying job in manufacturing is over. The US economy is global in nature. This trend will continue regardless of our current nationalistic trade policies. Low paying jobs are not going to change that much in our service oriented local economies. The stock market consists of willing buyers and sellers. It will always fluctuate according to supply and demand. As long as businesses find new ways to innovate and adjust to changing economic conditions, stock prices of well managed companies will rise.
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And today we get to use another old adage - the Dead Cat Bounce. A small reprieve based on some small number of good earnings reports, before resumption of the slide.
I went all cash in January. I'm waiting for the full 25% adjustment.
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@Mtnman1963 Well you didn't lose anything by doing that. We're now going below where we were in Jan. One bright note is that Money Market funds are now returning 2% whereas before they returned nothing. If they were to begin returning above 3% I'd be tempted to just keep all my retirement money there.
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Neil Irwin posits a rational, calculating investor class that has a realistic vision of where the economy is heading. The recent market volitility suggests quite the opposite, namely, impulse buying and selling.
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Wages are not growing fast enough and global risk is to the downside. The CEOs pocket most of the profits so I don’t really think you have a valid point here.
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Thank you for the explanation du jour.
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if you want the answers contact my broker:
Charles Ponzi
1 Wall Street
New York, NY 10005
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The stock market lost 3% on Wednesday. Exactly zero news about interest rates came out that day. You can’t explain the drop with rising interest rates. In fact, all the Feds recent rate rises have been almost perfectly anticipated by the markets well in advance (look at bond prices and the fed funds futures market). So if you want to explain why the markets have fallen so much in the last few weeks you can rule this explanation out. How about the fact that the world economy seems to be slipping? Look at the stock markets of our major trading partners - almost all of them have been losing ground over this year.
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The market rise from 2009 is a bubble built on 0 % interest rates and QE. The markets is trying to find its true level as the Fed removes the props from underneath.
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Old adage: The stock market is not the economy. This is especially true now that the stock market is not a market - it is a casino driven by computers trading on hundredths of a penny, regardless of value.
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@Mtnman1963 - - - I totally agree ! Am convinced the only human involvement, - if any - Is the nanocomputer operator who programs the 'jukes' to 'out-juke' his/her nanocomputer competitors. Resulting in the ridiculous, extreme volatility, like a wave usually over three to five days, of my investments. It's my - dividends - that allow me to sleep nights !! If one knew how the lead(?) nanocomputer was programmed, "Day Trading" would be a jackpot of gold . The most valuable employee in - every - Wall Street firm has got to be the "Le Bron James Juker" ! Whadaya think !!??
The stock market rally has come to its conclusion. As with all rallies they end. The economy is going through the same process. The Republican tax cut over heated the economy
in the minds of bankers. The idea that worker shortages was going to lead to wage increases instead of wage increases being a normal part of economic growth. The tax cuts are the harbinger of a laisse faire train crash. Trump's divisive foolish leadership cannot hold up and probably will have bad long term effects on the US economy due to international resentment over US high handedness.
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I am amused by all the forecasting and analysis of financial markets. Didn't someone say that the market predicted five of the last three recessions? Forecasting is very difficult, especially about the future.
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I wonder how much the Fed can control the much watched 10 year bond? We know the Fed is running down its balance sheet and that increased deficits will require more bonds to be issued. Will this increase in supply be offset by investors buying bonds, either because the rates are higher or as a safe haven. If rates surge more than expected and/or the trade war continues longer than expected and/or overseas impacts (Brexit, Italy, China) are worse than anticipated, I think the economy may well tip into recession within 18 months. This stock market correction may, in hindsight, be seen as forecasting that, even if it temporarily recovers the value lost in the past month.
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I doubt labor costs are the cost increases they're talking about -- more likely it's imported materials that will now be more pricey due to Trump's tariffs -- for example, I believe CAT explicitly made that point. The low average E/P percentages you quoted are mostly due to the extremely high valuations of the big tech companies (the FANGs etc.) so that number is a bit misleading.
We'll soon see how all this shakes out, but don't be surprised if the market goes up again without much change in the factors you have pointed out. What actually moves Mr. Market is one of the great mysteries of life.
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Stocks dropping are not good for workers. Their retirements are tied to stock performance. After the Republicans gut Social Security and Medicare, savings and investments will be the only thing workers will have for funding their retirement (or just not be able to retie at all). A drop in share prices means that workers will need to divert even more of thier income to saving for retirement.
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@David
I often disagree with Mr. Irwin and his rose colored outlook of our debt ridden economy. That said, certainly, one "take away" from his analysis should be that workers planning for retirement should be more interested in the earnings (particularly in terms of stability over potential) of a solid company and its stock's ability to pay a dividend more so than hoping for the future value of that investment to be driven by speculation. On the other hand, for money that you can "afford" to lose, then, go for it and take a chance.
1
@David I would add to your comment this: Most Americans don't have stocks or mutual funds at all to speak of. Many cannot afford to save like that and still eat. Others, who are saving, don't have the financial literacy to invest well. So the folks directly affected by the stock market are....not everyone.
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@David: Thus we cannot allow Republicans to gut Social Security and Medicare. The only way to stop them is to vote them out.
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What evidence do you have that low-paid workers’ wages are rising? Here in the Northweast, we are not seeing it. We are seeing most people desperate for work, forced into part-time jobs or gigs with scant or no benefits, no savings plans, no health insurance. Where do you see evidence that this is changing?
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@jimrecht Although you might be correct, I would ask for YOUR evidence of such a pessimistic view of the NE economy despite the overall strength.
3
It's little wonder that the stock market is finally hurting. When you replace good jobs with mediocre jobs or no jobs and gut your middle class, it's inevitable in our consumer society.
Our Lobbyocracy is uniquely unable to cope with aging demographics, climate change, healthcare, education, crumbling infrastructure, racism, prison reform, etc. We can't even fix healthcare! Bloomberg has just ranked us 54th out of 56 countries for healthcare efficiency.
Other Western countries learned that the feudal system doesn't work well, long-term and that you can't compete globally without sound middle class foundations. The next two elections may be the most important of our lives.
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