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Capitalism, not the Grinch, stole Christmas from Wall Street

By Masao Suzuki |
December 22, 2018
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San José, CA - On Friday, December 21, stock prices fell again, capping the worst week on Wall Street in ten years. Typically, stock prices go up in December, in what many call a “Santa Claus rally.” But not this year. The NASDAQ stock index, which includes many big technology companies, fell 3%, to end 22% below its August high, putting it in bear market territory for only the second time in the last 20 years. The NASDAQ joined the Russell 2000, a stock index of smaller corporations, which went into bear territory earlier in the week. The headline Dow Jones Industrial Average (DJIA) of 30 large companies, and the broader S&P 500 of 500 major corporations also declined to levels just short of a bear market.

With the holiday mood spoiled for many investors, the search for the Grinch who spoiled the ten-year party on Wall Street heated up. For President Trump, the Grinch was Jerome Powell, chair of Federal Reserve Bank (or Fed), the U.S. central bank. On Wednesday, December 19, the Fed Open Market Committee (FOMC), which sets interest rates, raised the target for short-term interest rates by a quarter of one percent (0.25%). At the same time, he said that the Fed would continue to allow its almost $4 trillion holdings of U.S. government and mortgage-backed bonds to shrink as the bonds mature and are paid off. This puts upward pressure on long-term interest rates.

But this is actually the ninth time that the Fed has raised interest rates over the last three years, and none of the increases spooked the stock market. The target range for short-term interest rates is now 2.25 to 2.5%, which is still low by any historical standards. In the last two periods where the Fed was raising interest rates, they peaked at 6.5% and 5.25%, more than twice today’s level. The Fed is only allowing about $30 billion in bonds to mature each month, or less than 1% of their total stash. In contrast, the federal government budget deficit means that the government is selling more than $70 billion in new bonds each month to pay for last year’s corporate tax cuts, among others.

For the Democrats, the Grinch is Trump himself. Some of the blame for Friday’s drop in the stock market was the impending partial shutdown of the federal government, caused by Trump’s demand for $5 billion for his border wall. Trump’s trade tariffs have also taken some of the blame. While they have increased profits for a few companies such as steel producers in the United States, they have increased costs for many more as the tariffs have mainly fallen on so-called ‘intermediate goods’ that U.S. businesses use to make goods here. Other businesses have suffered from the retaliatory tariffs that other countries have slapped on U.S. goods to fight back against the Trump tariffs.

But this is actually the third partial federal government this year, and the first two didn’t cause the stock market to slump. Trump’s tariffs have also been building for a while, starting in early 2017, almost two years ago. So as much as I dislike President Trump and his policies, especially on immigration, it is not fair to use him as a scapegoat for everything bad that happens.

The big problem is that there are more and more signs that the economy is weakening, and another recession is looming. In a recent survey, half of all CFOs (Chief Financial Officers) thought that a recession would start next year. In contrast to stock advisors, whose job it is to sell stocks, the corporate CEO’s, who are often chief of public relations and who job is to increase the price of their company’s stock, which is not going to happen if they go around predicting a recession. Recessions are a regular feature of capitalism. On average, a recession happens about every five years, and the last recession ended a bit more than nine years ago.

Not convinced? Check out my next article…

Masao Suzuki is Professor of Economics at Skyline College

 

 

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