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The Stock Market Doesn’t Matter
You’d have to be hiding deep under a rock, with the president of the United States’ Twitter account on mute, not to know that the stock market had some good days at the end of last year and beginning of this one.
“Stock Market just hit another record high! Jobs looking very good,” he tweeted in October. “Stock Market hits new Record High. Confidence and enthusiasm abound,” he gushed in November. “Things are going really well for our economy,” he enthused in December. “Stock Market hit another RECORD HIGH, unemployment is now at a 17 year low and companies are coming back to the USA. Really good news, and much more to come!”
“All signs are that business is looking really good for next year,” he predicted the day before Christmas. “Will be a great year for Companies and JOBS! Stock Market is poised for another year of SUCCESS!”
At first, it seemed his market forecast was right — and as it soared in the first month of 2018, so did his tweets. “Yesterday was a big day for the stock market,” Trump tweeted in mid-January. “American business is hot again!” He took credit for the stock market at least 25 times last month.
He even got a chance to brag about it on a much statelier platform: his State of the Union address to Congress. “The stock market has smashed one record after another, gaining $8 trillion and more in value in just this short period of time,” he said as he summed up what he sees as the economic accolades he accumulated in year one. “The great news for Americans: 401(k) retirement, pension, and college savings accounts have gone through the roof.”
He then quickly moved on to his one crowning legislative achievement of his first full year in office: the Republican tax bill. “We enacted the biggest tax cuts and reforms in American history,” he said.
The dubiousness of that claim aside — they will represent a smaller slice of GDP than those signed by Ronald Reagan or even Barack Obama — he was right to pair the tax cuts with the stock market gains. At that time, the market had been riding high, buoyed, in part, by Trump’s signature on legislation that will lower the corporate tax rate and offer a smorgasbord of other goodies to businesses. That means most will pay less in taxes, thus holding onto more of their profits—and so the thing that the stock market measures, or in other words, corporate America’s finances, will improve. That doesn’t mean there’s more money, though, just that it was moved around. “This was a huge transfer of wealth away from taxpayers, and to corporations,” economist David Autor pointed out in the Washington Post.
The dangerousness of Trump’s comments doesn’t lie in getting the size of his tax cuts wrong, nor even in highlighting an up market. It lies in assuming that the market serves as a measure of anything more than corporate America’s bottom line. Nearly every time he boasted about the market’s gains, he conflated it with other news about the economy’s actual performance: jobs, wages, GDP growth. He’s not the only one who makes this mistake. Some economic commentators watch the Dow as if it were a window into an ill-tempered economic god’s mood, taking the highs to show his favor and the lows to show we’ve sinned.
But the stock market doesn’t measure anything of substance. While it can be significant for those who have fortunes tied up in its immediate highs and lows, the rest of us — the vast majority of Americans — could do well to ignore them entirely.
That’s true even when the market tumbles. Trump is now quickly learning how the stock market’s favor can turn to fever in a heartbeat, even among signs of a healthy economy. On Friday, the market tumbled 2 percent, ending the worst week in two years. The selloff continued on Monday, with the Dow falling 666 points, the worst losses it’s ever posted in a single day. Combined, it fell 1,800 points, or 7 percent, in two days, although it rebounded some on Tuesday. Global stocks have also sunk.
Trump hasn’t tweeted the words “stock market” since the State of the Union. His spokesperson pointed out late Monday that “Markets do fluctuate in the short term…for a number of reasons.”
The White House is right. It’s hard to know yet how long the down market will last—whether some bubbles are bursting, or whether it’s more of a dip that will be recovered. It’s hard to even say for sure what’s caused the steep decline. Stocks may have been overvalued. Investors might be worried about the country’s debt load, which is set to increase thanks to the new tax cuts, and what that means for future interest rates. But one cause may be news that Trump was also bragging about during his State of the Union: wage growth.
Just before lauding the market’s upswing, Trump boasted, “After years and years of wage stagnation, we are finally seeing rising wages,” to a standing ovation.
Wage growth has, indeed, been elusive for years. Even as the economy continued to add thousands of jobs month after month and the unemployment rate fell below 5 percent, wages hadn’t budged much since the recession. More jobs and fewer unemployed people should, in theory, help push people’s pay upward, given that they are in a better position to demand more if they’re more sure of having work and businesses have to compete with each other for scarce employees, in part by offering more pay. But part of Americans’ recent economic frustration was that while they may have finally gotten jobs again, they weren’t earning a whole lot more for the hard work they were putting in.
That’s a bad sign just not for voters’ sentiments, but for the economy. Ours is fueled in large part by consumer spending. If workers don’t have more money to spend, that means fewer goods and services sold and less money made.
Last Friday, however, we saw some preliminary signs that wages had finally caught up with the rest of the happy economic indicators. The monthly jobs report released by the Bureau of Labor Statistics showed that average earnings increased 9 cents in January, leading to a 2.9 percent annual rate of growth, finally a healthy number.
That number, as positive as it looks, should be taken with a big grain of salt. The jobs report is incredibly noisy, swinging wildly from month to month, and one month’s gains in jobs or wages can easily be wiped out in the next. Even January’s news is only half full: while the average of everyone’s wages rose, pay for most workers — known as production and nonsupervisory workers, or in other words, most employees who aren’t bosses — only increased 3 cents, with an annual growth rate of 2.4 percent. Many of us may not, in fact, be getting large raises.
The stock market, however, didn’t seem to grasp those details. Friday’s report appears to be the main catalyst for its drop that day. Yes, you read that right: the potentially positive economic news that wages could finally be growing, which would mean better finances for the country’s workers and more spending at American businesses, caused investors to panic.
And thus we have a perfect depiction of why the stock market is not a measure of the economy. What spooked traders is the fear of impending inflation. If wages are rising, overall inflation might not be far behind, and that could prompt the Federal Reserve to raise rates. That makes it more expensive for businesses and consumers alike to borrow, which slows the whole economy down. But inflation has been pretty flat for years and is below the Federal Reserve’s target level of 2 percent. You might say traders were overreacting just a tad.
Not to be a full blown Marxist, but higher wages also mean, inevitably, less money that the owners of capital can sock away in corporate profits. If businesses have to pay more to attract and keep talented workers, that will eat into executives’ and shareholders’ cut of the money they make. That doesn’t in any way mean corporate America is about to run out of money trying to keep its employees happy. Profits have not just recovered the losses incurred during the recession, but soared past that mark, now sitting at 9.5 percent of the country’s GDP. Even as they’ve risen, wages haven’t budged, so there is tons of room for the spoils to be shared with the rank and file.
But it does mean that the thing the stock market is most concerned with — how much companies make — could shrink if wage growth really has finally arrived.
And this is exactly the problem with Trump bragging about the stock market, or anyone paying more attention to it than it deserves. The stock market is not the economy. It doesn’t measure economic health. What it measures is big companies’ profitability.
Its irrelevance goes even further than that. A bear stock market can have real-life effects for those who have a lot of money tied up in it, particularly if they need to tap their investments right away and can’t wait out the market’s fluctuations. That means the recent tumble could hurt an everyday person who is in immediate need of, say, cashing out her 401(k).
But for the most Americans, that’s not going to be a big problem. Sure, Monday’s stock market fall meant the 500 richest people around the world lost $114 billion from their fortunes in the span of two days. But they’re the exception to the rule. Only 14 percent of Americans directly own stocks. Another 35 percent have indirect investments in the market, such as through a 401(k). Just over half own none at all. It’s a lot harder for people with less money to save any of it for an investment, part of why about half of the country doesn’t even have a retirement account now that pensions have more or less gone the way of the dodo. Those who do invest can likely weather the current storm just fine: the richest 10 percent of Americans hold 90 percent of stocks.
So when Trump declared that the stock market’s highs were “great news for Americans,” he ignored most of the country. By the same token, many Americans can rest easy even as the market rises and falls. Only people who absolutely need to cash out now, or the wealthy whose fortunes rely heavily on stock returns, should be sitting up at night watching CNBC. The rest of us can spend our time focused on measures that actually tell us something about the real economy: the monthly jobs report released by the BLS (although we’d do well to watch the long-term trends, not the month-to-month fluctuations), quarterly GDP growth, and whether or not wages are, indeed, finally rising.
Bryce Covert is an independent journalist writing about the economy and a contributing op-ed writer at The New York Times.