I was listening to a news report this morning on a special election for congress in southwest Pennsylvania to be held on March 13 to replace a Republican congressman Tim Murphy who had been forced to resign in disgrace due to (what else?) a sex scandal. The district is heavily Republican but the party is nervous that that the current turmoil in the White House might put that seat in danger and they are pulling out all the stops. The Republican candidate was giving a speech and his main pitch was how well the stock market was doing since Trump was elected. That, for him, meant that everything was just peachy in the country, whatever else might be going on.
Like most people, I do not actively invest I the stock market by buying and selling shares. Of course, I am affected by the market because my retirement plans invest in it. I really do not understand what drives the market prices up and down. But one thing for sure is that for most politicians, it is the stock market that matters most. They do not care much about unemployment, bankruptcies, housing crises, or any of the things that affect ordinary people. But if the stock market suddenly takes a dive, then they become very concerned while if the market values rise, they think that the economy is doing very well. As long as the market indices keep rising, it does not matter a damn to them what is happening in the rest of the economy.
But what makes the market rise and fall? Every day, news reports chart the change in the stock market indices and then give reasons for it but it always struck me that these were facile and glib. How could one possibly determine the reasons for millions of trades made by so many people? As Bob Garfield pointed out some time ago on the program On the Media, such single factor analyses are mostly guess work and largely bogus.
Every trading day, reporters at the Associated Press, Bloomberg, Reuters, USA Today, The Wall Street Journal and a dozen other news organizations are expected to distill millions of discrete financial decisions and divine a single motivating factor. Some days it’s a Commerce Department report on business inventories. Sometimes it’s a jump in IBM’s earnings. Sometimes it’s the mysterious “technical factors” or dropping oil prices or terrorism jitters or investor optimism or the magical, all-encompassing “profit-taking.”
As far as I can tell, there are only two factors that make sense in driving stock prices: inflation and unemployment rates. Richard S. Warr, a professor of finance at North Carolina State University, explains the inflation-stock market link. He says that expectations of rising inflation should in theory affect stock prices both positively and negatively and thus cancel each other out but in reality only the negative side seems to occur.
There’s lots of evidence, including my own research, that many investors suffer from something called “inflation illusion.” They worry about the present value effect of inflation of stocks but they ignore the growth in cash flows and profits that result from higher inflation. This results in stock prices falling when they shouldn’t.
However, there’s a third, indirect way inflation affects stocks. And this might be what is causing the concerns in the markets today. This effect has inflation playing the role of a canary in a coal mine, warning that bad times are coming.
At the beginning of a cycle, inflation is often low. (It was practically nonexistent or even negative following the financial crisis of 2008.) But as the economy heats up and people have more money to spend (as is the case now), companies begin to sell more goods and services at steadily increasing prices, earning higher profits, while most people are able to find work.
As more stuff is being created and sold in the economy, the demand for raw materials and workers increases. Besides pushing up prices, this can also result in higher wages. The fastest increase in take-home pay in nine years was another “warning sign” that spooked investors recently.
Kate Aronoff and Ryan Grim argue that the gyrations in the stock market are a sign of a rigged economy that tries to keep people unemployed.
KARL MARX USED to say that unemployed people were capitalism’s reserve army. Though he didn’t invent the term, he meant that capitalism drew its strength from this army, standing at the ready to take a worker’s job if the current one didn’t like it. If unemployment levels are high enough, bosses can pay lower wages and treat workers poorly. If one of them quits, there are plenty more in reserve. But if the reserve army is depleted — if the economy is at full employment, and everybody who wants a job has one — then bosses can’t treat workers as disposable, and they can’t indulge their racism and sexism in the same way.
A boss who treats women or people of color poorly, or refuses to hire them, is at a supreme disadvantage if there’s no reserve army.
Now, when analysts say that the Dow Jones industrial average went up or down for this or that reason, they are often just guessing. What specifically moves a body as complex as the stock market is in some ways unknowable, but it is useful to explore the cause being ascribed to last week’s crash — rising wages — apart from its implications for the market. What it says about the way our economy is structured is much more profound.
Start with the suggestion, which seems odd on its face, that the market crashed because wages were seen to be rising. Anybody outside the financial system would immediately see wages going up as a good thing. After all, it’s what every politician in every party says they want to see happen. But for market analysts, it’s a bad thing, because it is said to be a signal that inflation is around the corner.
And if inflation is coming, then the Federal Reserve is likely to raise interest rates to slow down the economy and cool off the inflation. When the Fed raises interest rates, bonds become more attractive, so people move money from stocks to bonds — and the stock market dives. It becomes harder to borrow, so businesses and homeowners have less capital to throw around. Profits get squeezed by high-interest payments. And as interest rates rise, the value of older bonds, which pay out a lower interest rate, goes down. So people are losing money all over the place. All because wages started to go up.
Everything in the structure of the economy, then, is geared toward making sure that wages never rise. And for nearly half a century, this task has been accomplished. Wages haven’t budged since the 1970s.
They say that it need not be the case that low unemployment leads to high inflation.
The current recovery in particular has shown that the economy can maintain significantly low unemployment — below the 5 percent “natural rate” — and not experience inflation.
In a tight labor market in which demand is high, employers have to make a better sell to workers to either stay on the job or take one in the first place, since it’s easier to find something that either pays better or is offering better working conditions. It’s also harder for companies to find people to work for them, as there are fewer people looking for jobs. In that context, bosses sweeten the deal, promising perks like higher pay, bonuses, and vacation pay — in all, shelling out more money to entice and keep the workers they need. “As all employers are doing this,” Mason said, “they’re competing with each other and bidding up the price of labor. Competition leads capitalists to act in a way that contradicts their collective interest.”
That’s where the Fed comes in, he added, to “protect businesses from their own worst impulses of giving workers higher wages.”
The recent Dow Jones fluctuations have very little to do with a legitimate fear of inflation. The stock market panicked largely because CEOs and shareholders fear that they’re losing their upper hand over a workforce that’s cutting increasingly into their record profits. The Fed’s response to that may well be worse for the average American than anything that happens on the floor of the New York Stock Exchange: It may throw workers who are already hurting under the bus in the name of a stopping something — inflation — that’s nowhere to be found.
It is this that really bugs me about the stock market, that increased employment and higher wages are seen as bad things that cause it to go down. For me, those are good things but for people whose only concern is their stock portfolio, they don’t care that more people are now able to make ends meet and possibly emerge from debt.