The economy’s robust growth, low unemployment and decent wage hikes are supposed to fuel a steadily rising stock market, yet we’re seeing wild 400-point swings almost daily. What gives?
One answer is as old as the market itself: too much focus on the short term. Fact is, short-term stock-price movements have an embarrassingly bad record of predicting what the economy will look like in the long run.
Yes, as a general rule, bubbles eventually burst and sliding markets can drag down an economy. Economic and market cycles are among life’s few truisms. Over the long term, stocks are among the best investments precisely because after blowing up, they always recover, along with the economy.
The key is to identify the inflection points: when stocks are really going to tank, as before the 1929 market crash and the 2008 financial crisis, and when they’re about take off, as in the early 1980s, when the Fed squeezed out hyper-inflation and the Reagan tax cuts spurred an economic and market revival.
To do that, you need to separate what’s real about the nation’s finances from the daily “noise,” which often turns out wrong.
Take the noise in the fall of 2007; it was pretty positive. Companies were complaining about a credit crunch as banks responded to declines in housing prices and the economy slowed. But the Federal Reserve’s interest-rate cuts were also expected to keep the economy on track. In October, the Dow headed above 14,000 — a record high then.
As we know now, this “noise” was wildly wrong. In fact, there were severe imbalances in the economy and structural problems with banks beyond a mere slowdown in housing prices. No amount of Fed rate-cutting could stop the inevitable collapse of the housing market, implosion of the banking system and upending of the economy.
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By the time it was over, the US would be mired in the Great Recession and the Dow would fall to around 6,500.
The economy and stock markets have recovered mightily since those dark days, and we’re once again near record territory. But stocks are swinging because traders and investors are pricing in the possibility that things will turn south.
The economy is good on paper, but the noise suggests it could peter out in 2019 amid slowing global growth, higher interest rates and the Trump tax cuts losing their stimulative bite — not to mention Trump’s trade policies, which may slow growth, especially if other nations respond with their own tariffs, cutting out US companies from their markets.
The tax cuts goosed growth (as did deregulation), but they were skewed to large corporations, which used much of the excess capital to buy back stock rather than expand jobs and wages, which has a longer-lasting economic benefit.
Add in something unexpected, and you could have a recipe for disaster — unless, of course, it all really turns out to be noise and the market’s zig-zagging is nothing more than a storm before the calm.
Indeed, there’s also good reason to think the economy and markets will survive and even thrive in 2019. US corporate earnings remain decent, and stock prices ultimately reflect profits.
Trump may threaten steep tariffs, but his economic advisers have kept him from going nuclear. Trump’s tariffs on trading partners, besides China, ultimately may not be as big as his Twitter feed has promised.
The corporate tax cut was large — taking the top rate down to 21 percent from 35 percent — so its lasting power might be longer. Deregulation of US business will continue because it is directed from the White House; even as Nancy Pelosi & Co. take over the House, there’s little Democrats can do on taxes and regulations, and the Fed (at the jawboning of the president) is slowing interest-rate hikes, which is also good for stocks.
Meanwhile, it’s worth noting that the wild swings in stock prices aren’t just a function of worry-wart traders but also how stocks are traded today — i.e., through computer programs looking for an instant edge. Thanks to the rapid-fire nature of computerized trading, the Dow could be up 400 points one minute and down several minutes later.
Only the future will tell if the market’s noise about stocks and the economy is right. Meanwhile, it’s best to pay little mind to the short-term gyrations, which really is meaningless noise.
Charles Gasparino is a Fox Business senior correspondent.
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