December 2018 and the beginning of 2019 have been characterized by uncertainty regarding economics. Uncertainty with respect to financial markets is not unusual. What is unusual is the severity of the December sell-off and a president augmenting that volatility when we would be better off if he kept what passes for “thought” to himself.
The government shutdown for which he promised to claim responsibility, but now changed his tune, complicates an already mixed bag of signals, fears of a global softening economy, along with a strong December jobs report that goosed financial markets on Friday of the first week of 2019.
The bull market of some 10 years since the Bush/Republican Great Recession reached record highs in late 2018 only to drop precipitously in December. The sell-off can be explained by the end of the sugar high of the ill-advised Republican tax bill, Trump’s unilaterally imposed tariffs and the predictable response of other countries, signs of a softening global economy, and predictable, though not necessarily rational, overreaction to the Fed raising short term interest rates in December. Add to this the unnecessary Trump/Republican government shutdown.
President Trump was quick to criticize Fed Chair Powell and the Fed raising short term interest rates in December. In a sense, it was a no-win situation for Powell. If the Fed kept rates stable, as urged by Trump, he would have been accused of caving to Trump. By raising rates, he is blamed for augmenting the December sell-off with money managers, assuming that the Fed would continue its earlier announced policy of continuing to raise rates (coined as a “hawkish” policy) throughout 2019.
One can quibble over whether the Fed should have kept rates stable in December but continue to raise rates in 2019, or raise rates in December but maybe back off of a more hawkish policy in 2019, depending on the economy. The Fed clearly adopted the latter option.
In any case, with a fully employed economy and years of record low interest rates, the Fed can be expected to raise rates. That should shock nobody. There are plenty of other reasons for the December sell-off.
In the short term, markets generally overreact, as with the December sell-off. After Trump’s tirade, Powell assures the public that the Fed’s previously announced hawkish policy for 2019 is not cast in stone. Policy would depend on what happens, interpreted as a more dovish stance. This, along with that strong December jobs report, is credited with the market’s dramatic rise during Friday of the first week of 2019.
Powell’s announcement that he would not resign in the wake of Trump’s temper tantrum no doubt added to confidence in the market. The last thing financial markets need is a Fed Chair who is subservient to a president that, his ability to out maneuver the law and his real estate competitors notwithstanding, has limited understanding of the macro economy.
Is the worst of the sell-off over? Will markets rebound? With all the loose ends and moving pieces, who knows? Economists can’t predict the future, but neither can anyone else. We do know that while markets generally overshoot in the short run, the long run trend is up. Market corrections, or sell-offs —choose your own term — for whatever reason, are among the facts of life.
Sometimes the rational response to falling stock prices is to do nothing, or at least nothing different, especially for younger workers contributing to retirement funds. While it is disappointing to look at diminished values of retirement funds containing stocks, there is a definite upside. When stock prices are low, a given sum of money buys more stock. This is where dollar cost averaging, advocated by competent financial advisors, comes in. Rather than trying to “time the market,” focus on continuing to invest, assuring you buy the lows when they occur.
What about the general economy? Again, it’s a mix of the good and the bad. Unemployment is low, rising just a fraction with the strong December jobs report. How can unemployment rise with such a rosy jobs report? It’s because of how data are compiled. If an unemployed worker is so discouraged that she/he does not seek work, that worker is not counted as unemployed, considered a non-participant in the work force. But during a strengthening economy when workers actively seek work, they become part of the work force, whether employed or not. In other words, the labor force participation rate increases. Therefore, it is statistically possible for job growth and the unemployment rate to both rise at the same time.
Increased labor force participation rates and low unemployment are both positive economic indicators. A nagging problem, getting worse over several decades, is low wage growth and increasing inequality of incomes and wealth. The ill-advised Trump/Republican 2017 tax bill has made after-tax inequality even worse. With Republican control of the Senate catering to their wealthy donors and a president catering to his wealthy supporters, there is little possibility of anything on the horizon to turn this around.
Problems of international trade still loom. There is no sign that congressional Republicans, once chief advocates of international trade, will significantly oppose Trump in his self-imposed trade spat.
A potential, and very likely, problem is that when the next recession hits, the ballooning public debt will severely limit the fiscal capacity of the congress for necessary government spending to counter the recession. This is yet another downside to the Trump/Republican tax bill that increases the public debt during prosperity, at the very time when the public debt should be reduced.
And the government shutdown imbroglio? House Democrats have already introduced previous Republican-sponsored legislation to fund all except Homeland Security. Trump’s enabler in chief, Senator McConnell, refuses to introduce it.
Political uncertainty adds to existing economic uncertainty.
— John Waelti of Monroe can be reached at jjwaelti1@tds.net.
