American stocks just suffered their steepest, single-day decline in more than six years. News anchors hyperventilated. Streaming red arrows proliferated. Extremely online liberals thought of the president’s wounded ego, and celebrated; their conservative counterparts contemplated the same, and added the New York Stock Exchange to their list of “Deep State Enemies.” And you, dear reader, looked for someone to tell you what it all means.
The short answer is: No one knows, but probably not all that much.
In the wake of the 2008 crisis, wage growth and inflation were intractably weak. To compensate for those facts, the Federal Reserve kept interest rates near zero, thereby pushing investment into stocks. Then, over the past couple years, middle-class wages finally started to recover and economic growth was solid — but inflation was still nowhere to be seen. Thus, the Fed maintained (relatively) low interest rates, and stocks got to have their weak competition from bonds and a strong economy, too. Donald Trump proceeded to deliver giant corporate tax cuts — and equity investors went a little nuts: The S&P 500 posted a gain of nearly 6 percent last month, on top of a 19.4 percent year-end gain in 2017. Price-to-earnings ratios (the price an investor pays for $1 of a company’s profits) neared historic highs.
Which is to say: By January’s end, people had plenty of reasons to worry that the market was nearing a peak. So, when Friday’s jobs report showed unexpectedly strong wage growth — a development that could lead to both lower corporate profits (as labor’s share of productivity increases) and higher interest rates (as well-paid workers bid up inflation) — a lot of investors took it as their cue to reduce their risk.
That seems to be the consensus narrative, anyway. And there are a lot of different ways one could interpret it. If you decide that wage growth is what truly spooked the market, today’s dip could be a positive sign: In order to compete for workers in a tight labor market, businesses will finally have to redistribute gains away from shareholders and toward workers. If you decide that competition with bonds is the true source of fear — and that markets are intuiting that America’s rising deficit is going to force up interest rates significantly in the future — then the story looks a bit grimmer.
Regardless, what we can say for sure is that today’s market activity, in and of itself, isn’t especially alarming. The Dow Jones lost 1,100 points — but it’s still higher than it was in early December. Thanks to inflation, when the market slips by a little over 4 percent, cable-news anchors can point to very large numbers and say things like “the Dow just suffered the worst single-day plunge in points in history.” But this isn’t going to be remembered as the Second Black Monday. And while a sustained bear market could depress consumer spending enough to weigh down the broader economy, for the moment, there’s little reason to fear that we’re looking at a sustained bear market. Most economic indicators are positive. The planet is in deep long-term trouble. But the economy is, in the medium-term, (probably) relatively fine.