Monday, July 6, 2020
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Dow Jones down after a bad week

We could have predicted this stock market activity, I suppose, but in the week when President Donald Trump delivered his first State of the Union and came under increasing pressure in the Russia meddling investigation, the Dow Jones Industrial Average took a dive.

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An analysis by the Wall Street Journal, which reads like a textbook in an advanced economics class, said investors were concerned about interest rates going up soon, which could trigger a slowdown. But it’s also possible that this is a “correction” to recent unsustainable gains.

If you recall how Mr Trump touted the rise of the American worker. He said they would soon be making more money because companies would take their tax cuts and give workers raises or bonuses. Which is good for the workers.

Unfortunately, when people have more money to spend, they tend to spend it. That increases demand for goods and services, which makes prices go up. Inflationary pressure like that tends to spur the Fed to increase interest rates, which means companies won’t be able to get their hands on as much cash.

Then they’ll start laying people off, cutting out those raises, and we’ll be right back where we started, after a small correction.

“If we start to see growth slowing and inflation acceleration, that’s when I get concerned,” the New York Times quoted Erin Browne, head of asset allocation at UBS Asset Management, as saying. “As long as growth continues to improve, a little bit more inflation that we’re seeing now is fine.”

Inflation tends to happen during times of growth in the fast-paced investment markets. Yet the people who get lost in the shuffle aren’t those investors; the people who get lost tend to be those workers who get accustomed to being able to buy more things. They adjust their lifestyles, but then, when the rug gets pulled out from under them, they blame the government.

Now, Mr Trump was quick to underscore the benefits of his tax cuts; here we see a few drawbacks. Another side effect of those tax cuts, especially of the corporate tax cuts Mr Trump got through, is that people dump money into the system faster than our companies can produce the goods to buy with that money. When wages go up at the same time, all these put pressure on inflation, which stops the growth cold in its tracks.

The Dow Jones didn’t pass 25,000 all that long ago, and it was up over 26,500 at the end of January. Then Wall Street hit the wall.

There may be a temporary recovery, but many economists were concerned that the value in the market wasn’t real or that the gains the market was seeing were unsustainable.

“Do I think stocks continue to rise at their same pace? Absolutely not,” the Wall Street Journal quoted Kate Warne, investment strategist for retail brokerage Edward Jones, as saying. “I think stocks will continue to rise, but it’ll be a much more volatile ride.”

Paul Katula is the executive editor of the Voxitatis Research Foundation, which publishes this blog. For more information, see the About page.

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