Everything these days immediately turns political, and the stock market sell-off is no exception. Critics were quick to tie the downdraft to President Trump, noting that he had, after all, taken credit for the strong gains posted since his election.
That said, the stock market retreat is not all bad news for Republicans. First, it is happening early in the year; bulls would argue that the accelerating economy will override short-term anxieties in time to push shares higher before the midterm elections.
Second, nothing shows more convincingly the success of the Trump agenda that the stirrings of inflation that have jolted markets. The modest uptick in wages contained in the recent jobs report has alarmed some who think the Fed might adopt a more aggressive posture, raising rates more sharply than expected and slowing growth.
This is an overreaction; remember that the Fed, and central banks elsewhere, have hoped to push inflation to 2 percent. So far, they have failed. The latest reading on price increases was that core inflation rose to 1.8 percent in December, close but still short of the Fed’s target.
It is true that in January, wages increased 2.9 percent compared to the year before, the biggest jump since June 2009. That increase propelled bond yields higher, with the rate on the 10-year Treasury approaching 3 percent for the first time in years.
But, surely that is good news for workers and for Republicans. Remember that many years of stagnant wages were one of the critical issues in the 2016 election. Democrats like Sen. Bernie Sanders (I-Vt.) and Hillary Clinton argued that the government needed to artificially boost pay through jacking up the federal minimum wage.
Republicans ran on hiking economic growth, which they claimed would naturally lead to higher incomes. Liberal economists like Larry Summers, who blamed “secular stagnation” for President Obama’s tepid growth record, dismissed GOP ambitions as ridiculous.
Trump laid out a platform of lower corporate taxes and reduced regulation, which he said would elicit increased business capital investment, leading to higher productivity and pay raises. That is what is occurring now.
The economy added 200,000 jobs in January, more than expected. For the fourth month in a row, unemployment stood at 4.1 percent, the lowest level since December 2000. There is no doubt that the job market has tightened.
As important, capital spending has started to rebound, which is expected to lead to higher productivity. Last year, for the seventh year in a row, worker productivity underperformed, rising only 1.2 percent.
That is in line with the Obama years, but way below the historical gains of 2.1 percent achieved annually since 1947. Economists argue that productivity growth is essential to rising wages. Capital spending, in turn, leads to productivity gains.
Such spending has recently turned up, spurred in part by the tax bill, which allowed for immediate expensing of capital goods.
The most recent report from the Institute for Supply Managementindicated that factory demand for equipment was accelerating and that backlogs for such goods were lengthening — all signs of robust demand.
The shift from an economy and stock market supported by trillions of dollars in monetary easing to an environment dominated by accelerating real growth has shaken investors who have been on autopilot for almost a decade.
This is a tectonic plate shift in perspective, not a minor mudslide. The only big mistake that stock pickers have made over the past several years is to have sold nearly anything at all. For a lot of 30-somethings on trading desks, a world with volatility and rising interest rates is a challenge.
Going forward, investors will watch wages and other costs carefully, and they will dissect every utterance of our new Federal Reserve Chairman Jerome Powell. He has taken the reins from Janet Yellen just in time to preside over a chaotic market, with the transition adding some extra uncertainty.
But Powell is known to share Yellen’s caution and will likely for the time being share her presumed path forward, instigating two-to-three rate hikes over the balance of the year. He is not a bomb thrower.
Meanwhile, we should remember that almost every year, the market sustains a correction of 5 to 15 percent. This is the norm, not a reason to panic. It is also reassuring that the Wall Street buzz is that the plunge in shares has been driven by program trading; those investing on fundamentals are not selling.
Earnings and growth continue to be robust. Fourth-quarter earnings reports were upbeat and an unusual number of companies (75 percent) produced results above expectations.
Those who are warning of lofty valuations, as Janet Yellen recently did, cite price/earnings multiples that are at the high end of their historical range. But those levels reflect interest rates that are still low; as rates recover and earnings grow, P/E’s will drift lower. That does not signal a market collapse, but rather a modest correction.
For Trump supporters, the news is good on one other important front: The president will probably tune down his boasting about the stock market. He made a risky choice when he took credit for day-to-day stock gains; I doubt we’ll hear much of that going forward.
But he should continue to celebrate the rising confidence, higher spending and faster growth that unquestionably stemmed from his election. And Republicans should run on those accomplishments, which are good for middle class Americans.
Democrats have repeatedly argued that rising stock markets don’t benefit U.S. workers. If so, lower stock prices won’t hurt them, either.
Published on The Hill