To be clear, the stock market isn’t the economy. Financial experts across the board generally agree that although the recent drops have been substantial, taken as a single event it shouldn’t alarm you. And as I type this Tuesday morning, the Dow hasn’t yet tumbled, despite panic in international markets as they responded to Monday’s 1,100 point drop. Many of the same experts, however, are cautiously pessimistic about the future. And it’s worth noting that though the ups and downs in trading have kept canceling one another out, the movement has been volatile, and we don’t know what the afternoon will hold.
Whenever this happens we scramble to understand why. Markets are complicated, and this crash could very well have been a confluence of events, or with “sleeper” events, underlying conditions primed but not yet triggered. But let’s indulge in speculation for a moment: The most popular and most sober explanation seems to be that the drop reflects some pessimism about an economy that’s grown too big and too fast, as well as related fears about inflation.
Given the political climate, you might also say this is Trump’s crash. Or Obama’s crash. The market has been climbing steadily for years, so the record highs have very little to do with Trump or the GOP. Also, most of Trump’s presidency has been a continuation of Obama economic policy and budgeting. That’s now been handed off to Trump, of course, so we’ll have a good test ahead of us. Also note that Trump has taken credit — loudly, repeatedly, and stupidly — for the stock market’s rise, but so far, of course, he hasn’t said anything about the crash.
But the truth of this, as usual, seems to be a sort of grayish blend. Two lines have diverged: Economic growth; market drop. So what does that tell us?
Surprise, surprise: When workers do well, corporations don’t.
Explains a lot, right? Let’s take a look at what might be happening.
JOBS, JOBS, JOBS!
It’s no coincidence the sell-off happened after the January jobs report came out. That report in and of itself reflected good news for American workers: We added 200,000 jobs in January; experts had estimated it would have been 180,000.
Awesome, right? Sort of.
The U.S. has about a 4.1% unemployment rate. That’s pretty stellar. It’s not a sharp drop attributable to Trump, but part of a years-long downward trend that Trump at least hasn’t been able to ruin. But this indicates the U.S. economy might be “overheating,” or growing too much. Broadly speaking, the reasoning is that if you have full employment you also have nowhere to grow. People aren’t moving between jobs, either, and aren’t taking risks to create new businesses or other opportunities. So even though super low unemployment sounds great, it can freeze the labor market and stall the economy.
Trump has said that as President he’d be the “greatest jobs president that God ever created.” Last year the great job creator added fewer jobs than Obama did the previous year.
That’s to say when we look at the big picture, over the previous years, the jobs market has actually been cooling. Also, not everyone has benefitted: The distribution of employment is far from even in terms of location, class, and demographics.
But that might be why the January report alarmed investors: It could be a response to the new GOP tax plan, which Trump signed into law last month. The policy in that plan (corporate cuts) is designed to rev up the economy and create more corporate profits. That’s a problem when your economy is already revved.
Trump, though, doesn’t seem to know what happens to an economy that nears full employment, or maybe knows but doesn’t care as long as voters believe his numbers are good. The market knows, though, and it seems it reflected this immediately. Record low unemployment might be good campaign copy, but it can be bad for bottom lines.
Make money, money, take money, money
Pay attention to how your attention drifts to other things as this section goes on.
Last week we learned more people are finding work than we thought, but in addition to this they’re getting paid more for it: Wages have been climbing. This also sounds awesome, but only if you’re a normal American. If you’re a corporate interest, it’s not so hot.
For one thing, when companies pay their workers higher wages it might result in lower profits down the line. But on a larger scale, and this seems to be what investors got skittish about, higher wages mean more money will be moving around in the U.S. economy. Broadly speaking, the more dollars there are out there makes each dollar worth a little less. The pool of money gets diluted. When the value of the dollar drops, that’s inflation, and it’s been a big fear in the U.S. for several years, because after the recession the federal reserve took steps to make sure we had a bunch of money moving around in the economy. And now we do.
These recent inflation fears had consequences for the bond market. If you’re like me, once you see the word “bond” you know you’re done reading an article, so we won’t go into that. Just know there’s been a change in stocks and bonds and though it wasn’t much of a surprise, it wasn’t 100% expected, either.
Less certain, though, is how the Federal Reserve (and Trump’s new Fed Chief) will react to these trends.
You Don’t Care
Unless you’re a policy or finance nerd you probably felt your attention drift a little in that section. It became less about real people and more about faceless, abstract people and things that shape our economy. There’s a reason we feel distant: The markets don’t want what we want.
Look at those two trends: More jobs; more money. But in a general corporate financial sense, neither are actually good. That is, the best interests of corporate America oppose the best interests of the American worker: When we do really well, the markets don’t always do well, too.
The opposite is also true: When the markets are doing well, workers aren’t necessarily doing well. After all, the stock market has been booming, but at the same time so has the wealth gap.
Here’s a crazy stat: The top 1% in America now controls 38.6% of the country’s wealth. That’s up from 33.7% ten years ago (pre-recession). The bottom 90% of American households hold only 22.8% of the wealth, down from the pre-recession 28.5% in 2007. More depressing stats here.
It’s clear that the fruits of the recovery (Obama’s recovery) haven’t been equally shared. This is one reason it’s absurd for Trump to boast about the stock market, as if it mattered to his white working class base, when it indicates the opposite: Wealth consolidation. A stock boom is great for corporate interests and people with a bunch of money in the markets, but that’s far from most of us.
But that belies another myth: Trump’s base isn’t all that working class. In fact, his voters were more wealthy than Clinton voters. The only income-based demographic where Clinton outmatched Trump was Americans who made less than $50,000.
Shocker: Rich people want GOP tax policy.
And they got it: The GOP recently passed what they billed as tax cuts for working Americans, but which really stuff the pockets of corporations and the super rich. Here’s a great example of what smilin’ Paul Ryan considers beneficial to working Americans.
The irony — and the worry, it now seems to be — is that not only is this a shit policy for working Americans, but its corporate effects might also be shit. The economy has expanded almost to capacity, and in response the GOP has enacted expansionist policy. And Trump wants even more GDP growth.
All in all, this crash could mean we’re looking at a few things that might be converging now, or that might converge in the long run. First, the tight labor market. Second, wages versus corporate earnings. And third, an economy that’s growing too fast and in danger of inflation.
Oh, and fourth: A looming constitutional crisis in the largest economy in the world.
There indeed might have been a “Trump bubble,” in that the markets wanted to cash in when they could. Now that political instability has ossified and crisis is all but inevitable, things look shaky indeed.
Oh yeah, the government might shut down again on Thursday.