December was the worst month in the stock market since 1931. Last month was the best January in 30 years. Can we explain this volatility? Here is my lame attempt.
The stock market is a fascinating compilation of forces; a mixture of psychological fears and exuberance, measurements of individual business performance, a competition of investments and economies, and a forecast of economic growth. Political risk has become more of a factor; in the short run it is a voting machine, in the long run it is a weighing machine.
Our economy is addicted to growth. With low population growth and high growth in the entitlement state, economic growth is the only alternative. Ultimately, we may face a cut in the entitlement state, but historically it is a political nonstarter. Even a greater means testing of its benefits will have little impact on its costs.
The unsustainable debt and the uncontrolled entitlements will collide. Any tax increase high enough to impact this will cause a decline in growth, which will make the problem worse. We will face a decline in benefits. We will face the reality that the majority of these benefits are not directed at the poor.
Typically, the economy rebounds sharply after a deep recession like 2008. The slow growth experienced could have shown a delayed effect unleashed by the Trump election. The market may have been cheering more for the removal of impediments to growth than it was to the prospect of tax cuts and deregulation. Emerging from a long period of slow growth may have the same effect as emerging from a deep recession.
The repatriation of overseas profits was a stimulant, but it is not reoccurring. Tariffs may have counteracted some of the incentives; overseas industrial capacity for finished goods often avoids the effect of tariffs on raw materials. I fear that the tariffs may counter some of the economic potential; raising manufacturing costs and inflicting retaliatory costs. World trade is far more complicated than arrogant leaders understand. Republicans are no better at picking winners and losers than Democrats.
The cost of uncertainty is rarely considered and harder to measure. This is different from normal business risk. Political uncertainty is changing the rules that you must rely on. Blackjack has simple and solid rules. Its risks are understood. If the rules are always changing- if blackjack is 23 today and 19 tomorrow- the casino tables would be vacant.
Political friction multiples the uncertainty. It becomes exhausting and increasingly irrelevant. When we cannot predict the rules tomorrow, we may either freeze any action or just ignore them. We may demand higher short-term results since the long term becomes more unknowable.
Scott Grannis in Calafia Beach Pundit meticulously traced economic and financial indicators that indicate that the selloff was a panic attack. Read Financial indicators are healthy and Key economic indicators are mostly healthy.
Our economy is doing much better than the rest of the world. How long can that last in a connected world? Our economy is so diverse that we can still perform well while certain sectors underperform. Few other economies have that advantage.
Perhaps the trade war will end well. But until this is settled it is a drag on the economy; one that I imagine is underestimated.