I watch or listen to Stuart Varney on the Fox Business Channel whenever I get the chance. He is really good, has a fast-paced program, brings in great guests but hyperventilates over the vagaries of the equity markets. It’s that last part that really exasperates me. The equity markets are important to a lot of people. For anyone involved in any number of pension plans, the stock market provides the mechanism for growth and sustainability. I get that. What I don’t get is why people get so excited over the day to day vacillations in this index or that. I honestly do not believe that equity markets are good indicators of national economic health. What they represent, however, is a good temperature gauge of that day’s sentiments over current events. Announcing that the equity markets had one of their worst years in 2018 may be factual, but only in context. Thus, some context would be appropriate.
Let us look at the Dow Jones, NASDAQ and the S&P 500 since November 8, 2016. On election day two years ago, the Dow Jones was at 18,322; the NASDAQ was at 5,193; and the S&P 500 was at 2,140. On the closings of 2018, the indexes were at 23,327; 5, 193 and 2, 206. Those percentage changes over the past two years were 38.2%, 27.8% and 19.1%. Not bad considering where we were when Donald Trump won the election. When the talking pinheads on TV start casting the doom and gloom over the state of the American economy, just remember that the stock market is a thermometer and not a barometer. Further, the top 10% of households in America own 84% of the stock, so again, context matters.
The Dow Jones reflects the daily stock sales of around 2800 companies. Considering that there are some 28 million companies in America, the public trading of stocks from just one hundredth of one percent of American businesses really does not represent what is going on in the economy. Better indicators are such factors as gross domestic product, consumer price indexes and other factors that affect consumption like disposable income. I will much sooner hang my hat on 3.5% GDP growth than on watching the stock market fluctuate several hundred points in one direction or another.
Do I care how Boeing or Lockheed Martin are doing? Yes, I do. Do I care how Walmart is doing? Of course. But I look at those two entities, and those like them, to get a sense of where we are with the purchase of durable goods, capital investments and general consumption. If manufacturing and retail outlets are doing well, then I am more confident that we will continue to see strong growth in the economy. Still, it comes back to how confident consumers are in what and how they spend.
During the Great Recession, all the Keynesian economists were perplexed over the negative growth in GDP after the stimulus package was deployed. According to their models, there should have been a spurt in GDP. What happened? People took whatever money they could gather and began paying down debt rather than going out to Neiman-Marcus to buy that must-have English saddle or high-end drone. No, they wanted to give themselves as much of a bumper as possible, so human behavior dictated non-consumption actions.
Time will tell if the tax cuts and new trade policies will benefit the economy the way I think it will. There’s one thing for sure, though, and that is the American people are more confident in the economy today than they were on election day in 2016.