The first year of Donald Trump’s presidency was a historically great one for the stock market. This made a certain kind of intuitive sense given the people the real estate scion surrounded himself with—Wall Street profiteers, politicians accused of trading campaign donations for policy, since-convicted felons. So even as the Russia investigation mushroomed, the courts fought Trump over his travel ban, and the federal government generally descended into a state of chaos, traders ran wild. The S&P 500 rose by nearly 20 percent on the year, powered by a growing tech sector whose investors didn’t seem all that worried about the erosion of American political norms, much less a possible crisis in the legal system. While the republic’s long-term outlook remained hazy at best, things were looking pretty good for the top One Percent, and the president’s massive tax cuts seemed likely to fuel even more fun.
Then, on Friday, investors started to freak out.
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A significant decline on the major stock-market indexes at the close of last week turned into a bona fide plummet on Monday. When the closing bell sounded, the Dow Jones Industrial Average had lost well over 1,000 points in its largest single-day drop ever. (This was not the index’s largest relative decline ever; the Dow is much more valuable now than it was years ago.) But where did that drop come from? There were no new regulations or investigations into big banks announced. Unemployment remained low, close to 4 percent. The only significant piece of data that even roughly correlated with the sudden change in the market’s trend lines was the news that wages were going up. As the New York Times reported, “Average hourly earnings jumped 2.9 percent in January from a year earlier, the Labor Department said on Friday, the latest sign that the long, slow economic recovery is at last reaching Americans’ pocketbooks.”
Most casual followers of the news assume that higher wages are good news—so why would that cause the markets to tumble? And if stocks are falling because of a wage bump, does that mean we should be cheering the decline in stock prices?
For some perspective on this strange state of affairs, I called up Jared Bernstein, a senior fellow at the left-leaning Center on Budget and Policy Priorities (CBPP) who served as chief economist to Vice President Joe Biden. He’s been keeping tabs on Trump’s economy, including this first big sell-off, in a column over at the Washington Post. Here’s what we talked about.
VICE: This is the first major, sustained stock market selloff since Trump took office. Given all the chaos of his presidency, from the Russia investigation to the various travel bans to court fights and more, are you surprised it took this long?
Jared Bernstein: Not really, because there’s a split between the political chaos and what drives markets, which, generally speaking, in good times—that is, when the economy is percolating along—is not all that complicated. It’s current and expected corporate earnings of the companies that are publicly held. And if anything, Trump was signaling to the business community that he was going to provide them with goodies in terms of tax cuts and deregulation. I don’t know that he’s done all that much on the deregulation side, at least relative to his rhetoric, but he certainly delivered on tax cuts that heavily favor the corporate sector.
One might make arguments that the market was somewhat elevated, if you look at price-earnings ratios, but nothing all that far-out given expected earnings. Part of what we see here is an overreaction. There is a herd mentality that takes over.
The losses so far are hitting banks and energy companies especially hard. Should that worry normal people? Who actually hurts when stocks are selling off big in a situation like this?
If you rank households by their wealth, the bottom half hold very little or no stock at all, including in retirement accounts. And if you then look at who owns the stock market in terms of its value, well, the top 10 percent holds 84 percent of the value of the shares. So, broadly speaking, this kind of a sell-off doesn’t hurt average households.
If it persists, you can end up having wealth-effect problems. That is, part of what drives consumer spending is people feeling wealthier, and even if it’s a relatively narrow slice of people, that can certainly have an impact. But I don’t see that as a problem in the current sell-off.
For the uninitiated, can you walk us through why seemingly good news last Friday—that wages appeared to be trending up—helped send the market into this nosedive?
What’s spooking investors is the potential chain of events that goes like this: Wage growth triggers price growth or inflation; that leads to higher interest rates; that slows growth and cuts into profit margins. And remember, the value of the stock market is simply current and expected profitability. If investors convince themselves that this chain of events has been triggered, they’ll have a sell-off. That’s what’s happening.
To pause for a second here, is there actual, meaningful evidence that income for non-rich people is trending upward in a meaningful way—that income inequality is shrinking?
No. This is why I think we’re into an overreaction here, because while it’s true that one wage series [or chart] grew 2.9 percent January to January, those are noisy data, and if you sort of smooth out the usual ups and downs, and if you look at other wage series, you will see that wages are gradually increasing, as you very much expect in an economy with a tightening labor market like ours. Nothing surprising there at all. And nothing inflationary there at all. Remember, this whole chain of events gets triggered by wage inflation bleeding into price inflation. And that correlation has actually been pretty low for a while. That could change, and markets are always trying to look around the next corner. I get that. But the assumption that because you had a pop in one month of noisy data, is going to set off a chain of events that ends with a slower-growth economy and narrower profit margins, that’s more investors’ skittishness than reality.
You’ve pointed out that there’s something rotten about an economic system that gets freaked out by low-income people earning more money. Is that how it’s always worked?
It’s been that way for the last 15 or 20 years. I remember, 15 years ago, hearing people essentially say, “What’s good for Wall Street is bad for Main Street.” But it wasn’t always like that! But if you go back far enough, before all our economy was fraught with so much inequality—inequality of wages, of wealth, of income, of political power—there was more connective tissue between income classes. Although, I don’t want to tell a sugarcoated story—there was always people, particularly minorities, who faced really steep discrimination. But the idea that a month of wage gains would spook financial markets—I think that would have surprised investors from an earlier era.
What’s driving this trend?
At the core of this unsustainable model is the notion that corporate profitability depends in part on suppressing labor costs—workers’ paychecks. That’s one of the reasons why we’ve seen increased profitability and [simultaneously] wage stagnation. I think at the heart of this is this inequality problem. You see it in the tax code, and you see it in a lot of the Trump administration’s policies. What happens here is that if workers are catching a bit of a buzz; that threatens corporate profitability—through inflation and interest rates, as well as through labor costs that bite into profits. It’s a very shortsighted model, because an economically healthy middle class actually helps to drive economic growth.
How much of this is about what Trump and his administration are doing versus just how the market works now?
I’ve been seeing this disparity in play for 30 years now through very different administrations. What’s so nefarious about what the Trump administration is doing in the economy is it’s really exacerbating preexisting imbalances. We already have an economy that’s way too growth-heavy at the top, leaving way too many people behind at the middle and the bottom. Their policies make it even worse. Somebody called it unnecessary roughness. You already have the market economy delivering high levels of inequality, do we really need public policy to make that worse? Of course not.
The unfortunate thing is that even without Team Trump fueling existing market inequalities, we already saw these dynamics in play. Productivity is up about 80 percent since 1980, and median compensation is up [only] 11 or 12 percent.
Given those dynamics, is there a way in which it’s actually not crazy for lower-income people, or, say, those on the left politically, to actually be rooting against the stock market?
I don’t think a tanking stock market is a particularly great thing for anybody. Yes, stockholdings are concentrated among the wealthy, but there’s a lot of upper-middle-class people who get dinged by this sort of thing. I think the important thing here is less for low-income people to cheer the declining stock market than for high-income people to cheer higher paychecks. The fact that many in the investor class—unfortunately, it’s not just that many in the investor class fail to appreciate the need for wage growth. It’s that if they see a little, apparently they freak out and start selling their shares. That right there tells you the model is broken.
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