“This is no time to panic. There’ll be plenty of time to panic later.”
So far this year the S&P500 has lost 100 points (5%). Where did they put them? Isn’t hard to lose something that is pointy? Despite looking under every sofa cushion the search has so far remained pointless.
It may not seem like the time for humor, but the US market reaction to the meltdown in China is purely comical in many ways. It shows how much the market is responding to emotion rather than reality – and the prevailing emotion is fear. Run away!
By the time you read this, the December employment report from the BLS will probably be out. Given that the ADP December report showed a strong gain of 257k jobs we can expect something similar from the “official” numbers – despite the fact that this report is unreliable and noisy. Nevermind. The best bet is for the headline unemployment rate (U3) to fall from 5.0% to 4.9% and the more important comprehensive U6 rate to fall from 9.9% to 9.7%
We’re starting to absorb workers who are part time for economic reasons, which is a big and important change.
Consumer spending is up as well, as shown by the strong gains in holiday sales of 7.9% over last year. Milder weather, so far, looks to avoid the January blahs that held us back the last two years and may keep construction moving ahead. We have not had a year with these two this strong since 2004, the only year during the Managed Depression of 2000-2017 that managed to hit the magic 3.2% annual growth that has been the Post-WWII average.
That’s my call for 2016 as we continue to move ahead – 3.2% GDP growth, 8% growth in corporate earnings – along with a flood of at least $3 trillion in money from developing nations into US stocks.
If you believe any of this, why is the stock market dropping?
While the drop in Chinese stocks is entirely predictable for a lot of reasons, it’s still scaring the bejaysus out of investors. The US market did get ahead of itself in 2014 and spent 2015 moving up and down in spasms that ultimately came out about even. With the great cyclical bull market of 2010-2014 officially over the weight of the long-term secular bear market, which is to say the cycle we have seen through most of this Depression, is finally weighing.
The immediate flight is to a safe harbor of quality, which is to say long term Treasuries. The yield on the 10yr is down to 2.15%, way off from 2015’s peak of 2.48%. It should continue to go lower through the first six months of this year as turmoil continues.
Eventually, of course, the good news on on the economy and money flowing in should find its way to US stocks. But that won’t happen for another six months at this rate – and by then the S&P500 may be down another 5% or more for a net loss of 10% on the year. And it’s not as though the fear is not justified with Saudi Arabia acting very childish and stupid, too. There is a lot to sort out before good news actually looks like good news.
Naturally, this belies the old idea that the stock market is looking out XX years into the future. That hasn’t been true for a very long time, if it ever was. The financial markets look out no more than one quarter at best, and right now all they see is risk. Risk of war, risk of higher interest rates, risk of collapse … it’s all a big gamble.
Actually, it isn’t. Just like 2015, when workers’ wages did finally start to rise, what’s good for the average worker is what’s bad for Wall Street. There will be pressure on companies as wages rise and there will be skills gaps that are hard to fill. The run of stocks, where the top end of the nation got their cash first, is probably over.
It’s time for working people to take their turn.
Is there really nothing but risk? Not at all. The stock market is rather stupid and reactionary. There is, or will be, a great buying opportunity in the next few months as the panic subsides and China finally finishes either evaporating or shedding wealth to developed nations – primarily the US.
Meanwhile, this is no time to panic. It’s a good time for comedy, actually.