By Brian McKay
The economy and the stock market are like two drunk guys stumbling out of the bar with a rope tied to them. They might wander apart at times but eventually the rope tightens and they end up stumbling back towards each other.
The stock market isn’t a real time reflection, but really a bet on the future of companies and the economy. It’s a pretty damn good indicator considering tons of money is on the line. The guys on Wall Street usually have no clue what they are doing but all of their money together does(law of large numbers). To this end, stocks are considered a leading indicator (what stocks do is followed by the economy) of the economy, usually within a framework of about 6 months.
The recent stock market correction is not a good leading indicator.
Stocks have retreated for several reasons lately. A big one is that companies are up against diminishing returns. Years of record profits are up against a wall. The larger something gets the harder it is to keep growing it (law of diminishing returns). With the pressure to do so, CEOs will start cutting jobs or reducing hiring in order to keep profits high. The only good thing for employees is that a currently low unemployment rate has been slowly pushing wages up.
Companies are generally overvalued currently. Yes, sometimes those silly traders get ahead of themselves and a little over exuberant. During earnings season (when companies announce how their last quarter turned out) in January there were some signs given that things aren’t looking great in the future. Some companies are forecasting a tough time ahead and they usually try to be overly optimistic in order to keep shareholders happy.
In January the short traders came out in force with levels not seen since 2011. Short traders are betting stocks will go down and actually help push those values down as they increase the amount of people selling against the amount of people buying. It’s not a good sign.
In a 6-month period the markets corrected close to 10% on two occasions, which is something not seen since 1929. Yeah, to say something hasn’t happened since the start of the great depression is pretty heavy on the “this could really suck” level.
ISM manufacturing data has not been good. A strong dollar has really constrained manufacturing in the U.S. as it is more expensive for other companies to buy U.S. made products. Normally these are higher paying jobs and they just aren’t materializing.
And so this leads us into job and wage growth. January’s jobs report showed 150,000 new jobs created. The median forecast was for 190,000. Most of jobs added were in the service sector and wage growth has been pretty tepid. January’s jobs report hasn’t been good the last few years, but this one seems problematic as it wasn’t impacted by extreme weather that slowed hiring. The rope is tightening for those two drunk guys.
The fracking industry is imploding and threatens the economy and bank profits. Banks have billions in loans to the fracking industry which is showing growing defaults and bankruptcies daily. Cheap oil isn’t changing anytime soon and this industry simply can’t survive as the cost of production per barrel is really high relative to other producers.
In other countries we are seeing extreme weakness lately. China and Japan are really troubling. Watching large economies struggle is scary because the world is all interconnected now. What happens in one economy will certainly produce some bleed over into another.
Luxury goods sales are up and restaurant visits are trending down. Believe it or not the same trend happened in 2007 and has happened right before prior recessions. The wealthy have sold earlier in the year and are shopping at Tiffany’s while the average person is starting to feel the pinch right now.
This list could go on and on. There are some bright spots and overall the U.S. economy has been the bright spot in the world for a very long time, but things look worse every day.
Normally the big time, constant naysayers usually way overshoot what really happens, but this time they could very well be right. FOX News’ constant predictions of financial collapse are typically wrong and designed to scare people shitless. One must shudder the thought that they might actually have timed it right this time. Even bad predictions hit the mark once in a while.
Last week stocks bounced. Big deal. A bounce last week doesn’t mean a long term trend going forward.
Right now there is no shame in hoarding cash.
Featured photo courtesy of Flickr, available under a Creative Commons Attribution-Noncommercial license
Zenruption is committed to being a resource for the regular person. We believe in the little guy and hope to make a difference. Our business and money articles will always be our biggest focus with a hope of providing information in a simple format that is easily accessible.
Brian McKay is a co-founder of zenruption and has his MBA from Boise State University. Somewhere along his path in life he developed a true passion for economics and finance and wants to bring the knowledge that is so often hidden among a few insiders, to everyone. He once got attacked by a dirty, angry, little monkey in Egypt and has forever vowed to avoid them.
