The fundamentals are still strong. But the stock market collapse is on the president’s thumbs.
Share-price volatility is the price we pay for a tweet-driven, rather than a performance-driven, stock market. Especially when the tweeter is capable of a triumphant announcement one day that his tariff war might be ending because he has brought Xi Jinping to his knees (or at least to the dinner table) and the next day claims that he is “Tariff Man,” presumably staking out a claim for a post-presidential career as a new super-hero ready to challenge Spider-Man.
Yet despite the volatility, it is difficult to find a credible observer who does not believe that the American economy is in good shape.
* It is growing at an annual rate of at least 3 percent.
* The confidence of the CEOs of America’s largest companies remains at historically high levels, despite a dip from levels in the last quarter.
* The confidence of small business owners is at a record high, because they have received “tax relief and are freed from regulatory shackles” according to Juanita Duggan, CEO of the National Federation of Independent Business. The number of small businesses with job openings is at a 45-year high.
* The unemployment rate, according to the jobs report released by the government on Friday remains a low 3.7 percent.
* Inflation, running at a rate of 1.8 percent according to the Fed’s preferred measure, is well within the Bank’s target range of 2 percent.
* Consumer confidence remains at historically strong levels despite a small decline in November, according to the non-profit Conference Board.
* Consumer spending continues at a high level, and if retailers’ expectation of record growth in sales during the holiday season are realized, this should be the best retail year since 2011.
* The global economy should grow at an annual rate of 3.7 percent next year predicts Christine Lagarde, director of the International Monetary Fund.
As always, there are weak spots. Auto sales are being maintained at last year’s level, but only because of generous credit terms offered buyers. The housing market remains weak: rising labor and input costs are pricing first-time buyers out of the market, and higher mortgage rates are discouraging owners of existing homes from trading up. Consumers are spending at a rate that will not be sustainable unless the growth in personal incomes picks up. The most recent data suggest that the economy will slow a bit next year.
But there is relatively little to dislike in the economic data. The slowdown from the torrid pace of early this year is expected to be to around 2.5 percent, not exactly a recession. Which is nowhere in sight according to legendary billionaire investor Leon Cooperman, who says, “I look at the economy, at inflation, at monetary policy . . . [and see] no signs of a recession.” Jamie Dimon, CEO of JPMorgan Chase, agrees, “The actual fact on the ground is we still have growth in America.”
It is not the economy’s performance that is producing record volatility in share prices. It is uncertainty about trade, fiscal, and monetary policy that investors find unsettling. Start with trade policy. Trump’s volatility-bearer of olive branches in the morning and threats in the afternoon-produces market volatility. The herd mentality that traditionally caused waves of selling is now exacerbated by algorithmic selling-algo in traderspeak-which dominates about 80 percent of the market, and is the equivalent of lemmings on steroids. If the combination of tweets and algo dumping unnerve players in the real economy, unhappy days may be here again. So far, it has not.
Fiscal and monetary policy also have economy-watchers nervous. On the fiscal policy front, the massive trillion-dollar deficits caused by the Trump tax cuts might prove to be precursors of tax increases or sky-high interest rates. As for monetary policy, investors fear that the Fed will raise its benchmark interest rate too much, too soon. Robert Kaplan, president of the Federal Reserve Bank of Dallas says, “We’ve raised rates eight times over the last two and a half or three years. We ought to shorten up on our assessments and be really patient.” Several observers, including Donald Trump, Larry Summers, and several Fed officials agree.
Lest we lose faith in policymakers, we should keep in mind that if Trump’s tariffs do force Xi Jinping to lower barriers to the entry of U.S. firms into China’s markets, and abandon its blatant theft of intellectual property, the world trading system will be a much more efficient mechanism. And he can reasonably claim to have gotten the world’s leading trading nations behind a drive to reform the WTO to put a stop to many of China’s protectionist practices, as it promised to do when it was admitted to membership with the backing of the Clinton administration, which also pushed through legislation granting permanent normal trade relations to China.
As for fiscal policy, Trump’s tax cuts just might stimulate productivity-improving investment, enabling the economy to grow at 3 percent or more without triggering inflation. That would enable him to abandon his usual modesty and provide material for 1,001 nights of tweets.
Then there is monetary policy. The Fed has been careful to remain data driven, a fancy word for flexible. Future interest rate increases can be taken off the table as easily as they were served up. Chairman Jay Powell now believes the Fed’s rate increase later this month will bring the benchmark fed funds rate to or very close to “neutral,” neither threatening to allow the economy to overheat nor forcing it into recession. Friday’s report that job creation slowed to 155,000 in November from a monthly average of around 200,000, and that there is no sign of a wage explosion, will ease pressure on Powell to continue raising interest rates in 2019. His final decision will depend more on markets than on traditional Fed models, which are not famous for their accurate forecasts.
So here’s what we have. An economy that continues to grow more rapidly than had been forecast. It is slowing, but not to the anaemic 1 percent rates that followed the end of the financial crisis. The only threats to continued growth are from errors in trade, monetary, or fiscal policy. The first two are in the hands of President Trump and his impulses, the last in the hands of chairman Powell and his data.
As King Faisal said of a choice facing him in Lawrence of Arabia, “You may judge which is the more reliable.”