The stock market is tanking. It has to bode poorly for the economy, yes?
If we’ve learned one thing over the past six years, it’s that what is good for investors is not necessarily good for workers – and vice versa. As Herman Miller, an accountant friend of the family told me as a child, “Never forget that the stock market is only a market for stocks.”
So what is the future for stocks? In the short term, not good. For workers? That may be a better story. And if the fortunes of these two classes cross each other it’ll be the story of this year as the ups and downs and devilish details read something like a novel.
The stock market itself is hardly in trouble. Last year, the S&P500 managed an 11.4% gain, about 10% after inflation. It’s worth going back to the Barataria prediction in the market-spooky month of October to see how we did.
At that time, the prediction was for a lot of volatility and a small swoon by the end of the year. What we got shortly after that posting was an S&P500 dive back down to where it started the year, followed by a ragged increase. Not exactly a good prediction. Here’s what it looked like from October until today:
Given this track record, why would anyone listen to Barataria now? The short answer is that while we were off on the timing, the direction is utterly inevitable. Corporate profits are down as the strong dollar limits income from overseas and puts competitive pressure on US manufacturing. The European situation has only become worse with Greece electing an austerity hating government that is willing to take on the Germans like no one did before.
The volatility in stocks is a result of two forces on them, an uptick in the economy facing a corresponding uptick in interest rates. Since the market doesn’t look forward more than a few trading days anymore, we can expect that future events, no matter how certain, are simply not priced in. The fall we see now is something that should have come last year – but didn’t.
We will find out about interest rates on Wednesday as the Federal Reserve Open Market Committee releases their intentions, and we will know more about 4Q14 GDP on Friday. It should all point to a mid-year rate increase, even with mild inflation pressure. That’s about all anyone cares about.
No one is paying attention to jobs anymore for one simple reason – it’s been going well. We’ll find out next week how well, but it’s been a good ride so far. The economy remains on a pace to absorb the unemployed over the next two years, with labor markets tightening already. In an era where bad news is good news, driven by Fed watching, we can say that the only unequivocal good news is no news.
Which is to say, stop watching the news – it’ll drive you crazy.
We can see how upward pressure on wages may already be happening in this chart that shows average wages, adjusted to constant 2008 Dollars:
Note that wages spiked upwards right in the middle of the huge firing binge of 2008. That’s an artifact of the marginal workers being let go and the most productive employees staying on – often working long hours. It makes the wages of 2006 look pitiful by comparison.
Wages started to fall as the economy trudged along, hitting a low point in 2012 – two years after the bottom for employment. When any given worker can be replaced by someone off the street, wages stagnate or even fall. We saw that.
But now they are going back up and are, in real terms, higher than ever before. It’s an important milestone. It’s also a trend that we can expect to continue as employment moves forward and there are fewer workers competing for every job opening.
How does this all shake out for investors versus workers? Certainly, the big gains for investors starting in 2010 gave them an early lead in the race between the classes, widening the problems with income inequality. But this should be the year that this starts to change as the economy normalizes and gets back on track.
It may be a bad year for investors, but it’s most likely to be a neutral year of few gains. Those should go to the workers if trends continue. And those trends didn’t get started a moment too soon for working families in America.