By allowing ads to appear on this site, you support the local businesses who, in turn, support great journalism.
Nation faces stock market madness again
Placeholder Image
It had to happen - it was only a matter of when. The nine-year bull market had to at least take a deep breath. While nobody could have predicted the exact date, no thinking person should have been shocked at the recent fall, pause, correction ... choose your own description.

President Obama never claimed credit for rising markets under his tenure. He was wise not to claim credit for something over which he had no control. Although rising stock prices are preferable to falling prices, he knew that rising financial markets had limited connection to financial welfare of the vast majority of citizens.

President Trump showed no such wisdom or common sense. Prior to election, he dismissed rising financial markets as a bubble, solely due to low interest rates engineered by Fed Chair Janet Yellen. If interest rates rose, however slightly, the bubble would burst, he preached.

Trump gets elected, and financial markets continued to rise. Instantly, we're not in a bubble, according to Trump. The continued records set throughout 2017 and January 2018 were suddenly due to his genius and economic management, he reminded us.

While the economic trajectory Trump inherited was established under Obama, we can concede one point to Trump, namely, the euphoria and temporary sugar high created by the Republican tax bill that provides huge tax reductions to corporate CEOs, Wall Street minions, and the nation's wealthiest 1 percent.

In previous columns I have compared Wall Street's enthusiasm for tax cuts to Pavlov's dogs that responded to the ringing of a bell, anticipating arrival of food, whether it would arrive or not. Tax cuts heavily tilted toward the nation's wealthy elite similarly created the imagined prospect of even greater economic prosperity and stock prices, whether they would arrive or not.

But there is another old Wall Street adage, "buy on the rumor and sell on the news."

Scribes and pundits who babble about these matters offer a laundry list of reasons for the recent financial trauma. These reasons center on rising interest rates, seen as bad for stocks. Just as rising stock prices are said to be fueled by the Fed's expansionary monetary policy and low interest rates, rising interest rates accompanying full employment are seen as putting an end to the party - even if rising interest rates accompany full employment and an improving economy.

Even Fed Chair Janet Yellen's critics must credit her with engineering a steady path contributing to economic recovery. Expansionary monetary policy was essential to recovery from the Bush Great Recession. Some critics urged her to keep rates low, while others suggested a more rapid rise. In any case, she was careful not to create surprises that would roil financial markets.

Yellen's successor, Jerome Powell, promises to carry on with Yellen's policy. But there is understandably some nervousness in the financial community until he proves himself up to the job.

There is another, more mundane, reason for the sell-off, er, "correction." That is, simply, that the market was over-bought. Fueled by factors including the tax cut sugar high; enthusiasm generated by constant record highs; and arrival of late comers afraid of "missing out," who characteristically buy at record highs; stock prices rose to levels unjustified by future earnings. In other words, prices were unstainable.

Prices of stocks relative to earnings (the P/E ratio) rose to about 18.3 at the end of January. This contrasts to a 25-year average of about 16. Anybody paying attention knew that there eventually would be a reversion to approximate historic norms.

When, for any reason, selling begins, prices often fall much faster than they rise. Computer algorithms set to sell at predetermined prices go into effect, selling massive amounts of stock, with rapidly falling prices. Speculators who have bought on margin are forced to liquidate their positions. These sales generate rapid price drops, creating panic and hysteria, causing the record point drops in the Dow and the S&P 500 such as those recently experienced.

Poor President Trump - he who claimed credit for all those record highs now claims that the markets are "unfair" - delivering falling stock prices in the face of "good economic news." So we're supposed to feel sorry for the "financial genius" who now acts like some poor sap "cheated" by the markets? It all proves that he's either playing us for fools, or that he doesn't know as much about financial markets as he claims. It's folly for a politician to tie him/herself to something over which they have no control. Obama knew better; Trump did not.

While there can be a loose relationship between the real economy and financial markets in the long run - general prosperity is associated with good corporate profits and rising stock prices - short run relationships are unpredictable. For example, rising employment - good news - is read as indicating possible inflation - bad news. At market close, "analysts" will attribute the appropriate reason to explain the day's result. So the usual daily fluctuations, and after-the-fact explanations, mean essentially nothing.

The hard fact is that short-run fluctuations are fueled by emotion as much as by economic logic. In the long run, with general economic prosperity, stocks tend to rise. But short-run fluctuations are unpredictable. Longer-run corrections such as this one are inevitable.

It all must be kept in perspective. Although the recent daily point drops set records, they were far from record percentage drops. Markets remain near all-time highs, but problems remain. The ill-advised tax cut bill provides fiscal stimulus at the wrong time, portending possible inflation. Through rapidly expanding public debt, it reduces the political feasibility of deficit spending should it be required in the event of the next recession.

It is emotionally disturbing for workers to look at diminishing values of their 401Ks. However, a given monthly addition to 401Ks buys a larger share of corporate America with low stock prices than with high stock prices. What counts is stock prices, hence value of the 401K, when funds are withdrawn.

- John Waelti of Monroe, a retired professor of economics, can be reached at His column appears Fridays in the Monroe Times.