Among the many banalities of partisan rhetoric is a rationalizing of the Dow Jones when it is falling or stagnant and a fetishizing of it when it is ascendant. Countless social media memes, not to mention articles in the business press, have be written comparing the stock market performance during Trump’s first year in office to Obama’s first year. This dynamic, of course, can be extended to the economy in general. There is no need to particularly pick on the Trump administration when it comes to this kind of thing, but as with everything else it does present an easy target. After spending months campaigning, with much justification, that the federal jobs reports were ‘phony’ (though of course Trump managed to divorce his critique from any semblance of reality), when the first such report of his presidency came out, less than two mere months after being inaugurated, his luckless press secretary Sean Spicer when questioned about Trump’s previous comments was forced to blurt ‘I talked to the president prior to this, and he said to quote him clearly. They may have been phony in the past, but it’s very real now.’
Still it is the stock market that keeps the news cycle’s attention. Quarterly reports come out only a few times a year. The tribulations of the Dow Jones, symbolized by the pomp of the opening and closing bell, are a daily fascination. Strange this would be the case: stocks are owned by a very small percentage of the population. The top 1 percent owns 40 percent of them. The wealthiest 10 percent own 84 percent, the top 20 92 percent. Half the households in the country own no stock at all, including through mutual funds and 401Ks. Roughly a third of households own some shares indirectly through 401Ks but only 14 percent own any stock directly.
Much like the rest of the economy, the stock market is becoming a less human, more automated affair. Traditional trades account for only 10 percent of trades, up to 60 percent of trades are “quantitative investing”, meaning done by algorithms- computer programs that can make thousands of trades a second. This has obvious volatility built into it- if machines reacting in millionths of a second get more dominant and all go in the same direction at once there’s less of human element to pull back. Treasury Secretary Steven Mnuchin was quoted on February 6 that algorithmic trading ‘definitely had an impact’ on the previous day’s record 1175 Dow drop. Back in May 2010 there was the infamous Flash Crash where the Dow Jones index lost 9 percent of its value in a matter of minutes before recovering.
If all this seems beyond the public that looks to the stock market for assurance, in a major way it is also beyond the economy itself. The price-earnings (P/E ratio) measures a company’s current share (i.e. stock) price relative to its per share earnings. Since the mid-1930s the median P/E ratio for the Standard & Poor 500 stock index is 17. It currently stands at 25. Another metric is the CAPE index, ‘cyclically adjusted price-earnings’. It measures real earnings per share over a 10 year period and corrects for inflation. The historic median is 16. Currently it is at 33.
In other words the price of stocks isn’t reflecting productive economic activity. Instead it reflects a long-standing trend of corporations using low interest rates to borrow funds in order to buy back shares and elevate stock prices. Since the mid-1980s corporations have become by far the most important buyers of their own stock. The dirty fact is that money cannot be made as fast by actually investing in production, meaning new plants, equipment, workers, etc., as it can by pumping up stock prices. Most top executives get paid with stock packages and certainly based on stock performance.
For all the media focus on worker bonuses and raises in the aftermath of the latest tax cuts, according to the research firm Birinyi Associates companies have announced $171 billion worth of stock buybacks this year, a record high for this point of the year and more than double last year’s total at the same point. This compared to around $6 billion in bonuses and wage hikes. A survey by Morgan Stanley analysts released earlier in February found that companies would pass only 13 percent of the tax cut savings to workers (bonuses, raises, benefits) while 43 percent will end up with investors. For manufacturing it will be 9 percent and 47 percent.
Since 2012, nonfinancial corporations have made net investments (‘net’ means after allowing for the depreciation of existing assets, depreciation being an accounting maneuver that allows an owner to write off the value of property over time) of $2 trillion. Over the same time $6 trillion has been spent on dividends, buybacks, and takeovers. Meanwhile U.S. productivity growth is at its lowest level since the 1800s.
What set off the recent volatility was a U.S. employment report showing that the average hourly earnings (AHE) rose 2.9 percent annual rate in January, the highest such raise in nine years. Since the current recovery began in June 2009 profits and stocks have recovered and wages have been considered the missing link. There are shadows hovering over that 2.9 percent. According to Labor Department statistics (reported by the LA Times) much of the raise is concentrated at the higher end. The average pay in banking, insurance, and real estate jumped 4.2 percent in January, though even here nonsupervisory employees in finance got an average increase of just 1.6 percent. For nonsupervisory workers, over 80 percent of the private sector workforce, AHE was up 2.4 percent for the year in January, same rate as, on average, the past two years.
More to the point is why long overdue wage increases would spook the stock market. Absent laws that mandate it, wages raise in a market economy rise when unemployment falls enough to the point where employees simply can’t hire unemployed workers to replace workers who demand better pay (Marx labeled unemployed workers as capitalism’s reserve army). With less of a reserve army employed workers have more freedom of movement and hence more leverage and better pay. The problem is this theoretically leads to a rise in prices, ‘wages go up prices go up’, i.e. inflation. Those who sat through Economics 101 may recall the ‘natural’ rate of unemployment to avoid triggering inflation is 5 percent (meaning 5 percent of the workforce should be unemployed in order to keep the employed from improving their lot).
The specter of inflation means a rise in interest rates. A raise in interest rates means bonds (government bonds specifically) become more enticing to investors than stocks which cause the stock market to drop. Higher interest rates also raise the price of borrowing, the main purpose of which the past thirty years has been to buyback stocks to keep stock prices rising. As interest rates rise older bonds, issued when interest rates were lower, lose value for those holding them. Plus most loans are fixed in dollars. Inflation reduces the value of dollars meaning lenders stand to lose money as inflation increases. Therefore even modest increases in inflation are seen as a crime. Add all that up and it is clear why wages haven’t budged in four decades.
The Federal Reserve, along with Central Banks worldwide, has an inflation rate target at a very modest 2 percent, reflecting the low inflation interests of the finance industry. Since this target was set in 2012 the Fed has actually undershot it for 66 out of 72 months. A raise in interest rates over fear of inflation would mean more unemployment and thereby more surplus labor and lower wages. However there is little evidence that modest increases in inflation to 3 or 4 percent, even if it came, would cause great harm to the economy. Evidence from the past two decades, including from the late 1990s and during the current recovery, also suggests that the link between wages and inflation is broken, as unemployment has been below 5 percent without triggering inflation- though this may also speak to the kind of low paying jobs being created by the US economy.
Recent news stories have proclaimed that Democrats are having a difficult time finding their voice as the recent tax cuts are showing up in paychecks across the country, along with a very well-funded campaign by businesses touting their post-tax cut generosity. This after the US Chamber of Commerce, the National Association of Realtors, and the Business Roundtable spent a combined $56 million in lobbying the last three months of 2017 (this effort included over 6000 lobbyists, enough for 11 lobbyists for every member of Congress). A good start would be an effort against a rigged economy that keep wages low while letting finance suck up all the wealth and production. Of course more likely is the next Democratic president crowing about a rising Dow Jones during a State of the Union.
Joseph Grosso is a librarian and writer living in New York City