It Doesn't Matter That Nobody Understands Stock Market Swings (Even Though Stock Markets Matter)
Two of the major US stock indices hit record highs yesterday (and are up again today, although markets are still open), even as the Iran war looks more and more like a quagmire and consumer sentiment is at an all-time low. How could that be happening? I will eventually get around to refusing to answer that question, but I will begin this column with a digression.
There are some truly terrible jobs out there. Some are shockingly dangerous, such as logging and roofing. Some are deeply unpleasant as an assault on the senses, such as sanitation workers and "professional armpit sniffers" for deodorant companies. Some are possibly even more unpleasant as an assault on one's sanity, such as staffers for politicians and late-night TV hosts who watch right-wing cranks on podcasts and cable news for a living.
That said, one of the most pointless, soul-deadening jobs that I can imagine is being the person who has to try to explain why stock markets went up or down on any particular day (or even over longer time frames). What is so awful about that job? It would be bad enough if it were merely repetitive, saying things like "the Fed cut rates, so stocks rallied," or "traders anticipated a bad inflation reading this month, so markets dropped," on an endless loop. What makes it ever so much worse, however, is that such people often find themselves saying that "the Fed cut rates, so stocks fell," or "traders anticipated a bad inflation reading this month, so markets rose."
As confusing as all of that is, it is possible to convince oneself that those are not contradictory statements, essentially because every day's price changes are over-determined. This allows anyone to claim that whereas, say, a Fed cut should normally be good news, it was different today because ... uh ... er ... because the markets had previously priced in the cut, so other bad news took center stage, or because a Fed cut now means a Fed increase sometime later, maybe?
In light of these imponderables, it is always worth going back to one of my favorite quotes from my favorite economist. John Maynard Keynes (the bête noire of the right for most of the last one hundred years) is perhaps most famous for saying "In the long run, we're all dead," or perhaps "When the facts change, I change my mind. What do you do, sir?" (The latter quote is possibly mis-attributed to Keynes). He also, however, once wrote that the movements of financial markets and other transactions "can only be taken as a result of animal spirits ... and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."
Keynes was an especially reliable observer in that regard, because he was an active speculator who had real success (along with some disastrous failures) managing the endowment of King's College, Cambridge University. If he says that humans make decisions based on instinct and uninformed overconfidence, I tend to believe him.
On the other hand, even though I have known all of this for my entire professional career, I do have some sort of predictive model in my mind that is on autopilot most of the time. When stocks plunged a year ago in the aftermath of Trump's ridiculous tariffs, that made sense. When stocks soon recovered and went on to set new records, however, that made no sense -- especially because the things that seem plausibly important to businesses had only become worse, most importantly the utter uncertainty of everything in the second Trump term.
When people talk about "market fundamentals," the idea is that stocks as claims on future profits of a company should be priced in light of those basic facts. If something happens to make a company's future seem more promising -- beating a lawsuit for fraud, say, or announcing a valuable patent -- share prices should rise. Things like price-to-earnings numbers are supposed to capture the fundamentals, but even if they did, the signal-to-noise ratio can be very low for a very long time.
In a column last April, I noted that one of Trump's most visible economists, Kevin Hassett, once co-authored a book that claimed to rely on such fundamentals to conclude that the Dow Jones Industrial average should have been three-and-a-half times higher than it was. They were very wrong.
Of course, Hassett continues to beclown himself on Trump's behalf, include saying these words out loud earlier this week (starting at the 4:32 mark of Stephen Colbert's monologue from last night) to explain what might reduce consumer prices: "Imagine that, if oil prices start going back down, because the situation resolves itself, somehow, that you could be looking at ... at inflation close to zero." Sure, why not? If things happen, then they will have happened. And some of those things might have caused prices to go up, so they might go down.
All of which is a fun digression that allows me to note a key distinction. Hassett's attempts in the past to explain what should happen to stock prices are not uniquely fatuous, but he continues to prove to be in a class of his own when it comes to uttering nonsensical gibberish in defense of Trump on all other topics.
As I noted above, I am fully committed to not answering the question of what could possibly explain the record high stock market this week (or any other time). As I conceded earlier, my gut-level auto-predictor did not see this coming. That, however, is the opposite of a surprise. It is all just guesswork. A friend sent me an email asking for my reaction to three possible explanations:
1) Perhaps it is related to the oddity that we talk about record highs in stock indices w/o adjusting for inflation. Energy prices are likely to stay high for a while, which means high inflation [note: or at least continued high prices, even if inflation levels off], which means that prices of stocks could go up while their [real] value stays flat or even declines.
2) Or perhaps it's one of those bad news is good news stories: IMF warns of a global recession; markets expect that means lower interest rates; lower interest rates make stocks more attractive; buy now.
3) People who play the markets are mostly right-wingassholes[stet] who don't realize what complete fuck-ups Trump and his team are, so they're just assuming that the war will blow over because that's what people in their circle believe.
Based on what I wrote earlier in this column, my answer here should surprised no one: "Yes. Possibly. To all three, or maybe only one or two of them. I think. But not with any amount of confidence."
Frustrated yet? What is especially unnerving about all of this is that stock prices matter in a very big way for a lot of people. Personally, my standard of living in retirement is (because most universities do not have traditional defined-benefit pensions) almost entirely dependent on the financial markets. And now that almost no jobs come with old-fashioned pensions, many other people are also indirectly invested in stocks through their defined-contribution plans (like 401(k)'s and IRA's). When Trump brags about the markets, he often tells people that they should be thanking him for how much money they have in those accounts. He is wrong to take credit, but it is true that market prices matter to tens of millions of people in a very real, bread-on-the-table kind of way.
What makes the current situation especially troubling, however, is that overall economic inequality in the US is even worse when it comes to stock ownership. Very, very few of us could get by in retirement without relying on Social Security and Medicare, and when US employment and wage growth are going in the wrong direction -- as both are under Trump -- that means that even fewer people can put money into stocks to benefit from future stock price increases. It also makes it more likely that reduced tax revenues will give Republicans an excuse to scream about deficits and thence to return to their fervent desire to end (or at least deeply cut) America's two most important and successful social insurance programs.
An economy with rising financial markets and falling real activity (like job creation and income growth) is an economy that is necessarily intensifying inequality. We therefore know that we want the economy overall to do well, even as we have no reason to want the markets to fall. Although there is an infuriatingly indescribable illogic to the movements of financial markets -- a fact that should remind us to stop trying to explain market swings -- this all comes down to the most basic of truisms: Broad-based prosperity, not Wall Street feeding frenzies, should be our goal. That might seem obvious, and it should be. Yet here we are.