Middle-Class Recovery News Helps Weak Stock Market
After a big selloff beginning last Friday, US stocks are attempting to stay above Monday's low as crude oil prices also appear firmer.The big news that ought to boost them was an unprecedented Census Bureau report that individual income, particularly middle-class prosperity, has finally improved after the financial crisis of 2008. Whether the markets act on such remarkable positive new or not will reveal how disconnected Wall Street may be from Main Street.
By Vikram Rangala
Wednesday, September 14, 2016
The news from the Census Bureau Tuesday was unprecedented and remarkable for several reasons. First, median middle-class wages surged 5.2% between 2014 and 2015, the first annual increase since 2007 and one of the largest annual rises since the Census Bureau began tracking it. The median household’s income in 2015 was $56,500, a record.
From 2008 through the end of 2015, US non-government, non-farm employers added about 12.5 million new jobs, cutting the unemployment rate from nearly 10% to less than 5%. During that same period, US stocks more than tripled in value, with the S&P 500 rising from a low of 666 in March 2009 to the recent highs over 2100.
But while the two positive trends have happened over the same period, for most of those years the two processes didn't seem to have much to do with one another. Real median household income actually dropped from 2007 to 2011, year after year, even as the investor class reaped profits and dividends and the wealthiest 1% saw unprecedented gains in their overall share of the nation's wealth.
This led to a lot of headlines about the "jobless recovery" and rising inequality. The latter especially continues to be a horrible problem, one of the great challenges of our time. But the strength of US job creation in 2014-2015 was enough that the Gini Coefficient, a common measure of income inequality, was unchanged during that year. This is hardly a reversal of the inequality trend and the economy has a long way to go.
But good news is good news. If investors really were looking to reflect economic conditions with their own bullishness, the market should be in a huge rally today. It isn't.
One likely reason is that this good news for the middle class is also seen as good news by economists. Some of those economists are voting members of the Federal Open Market Committee and other economists advise the Fed on monetary policy (or nag the Fed via their op-eds and blogs).
"Several Fed officials have said in recent weeks that they feel confident enough in the economy to seriously consider a second interest rate increase at next week’s policy meeting," reports WSJ MarketWatch. Experts disagree on whether a rate increase this month would be a boon to the recovery or cause major damage. That uncertainty, on top of the uncertainty about what the decision will be, makes many investors nervous.
Until the Fed announces one way or the other, the market is likely to remain volatile, dropping and rallying in ways that seem to have nothing to do with what's in the news. Even when the news is something as major as this Census report. And with a large net withdrawal from the markets by funds and individuals, volume is thinner, which means that any move has less resistance to keep it from becoming a large move. Thin volume equals greater price volatility, in most cases.
For economists, this disconnect between the market and the economy is another sign of how divorced the investor class has become from the world the rest of us live in. The middle class is finally part of the post-crisis economic recovery and the markets seem to be greeting the news with a yawn. Poverty is at its lowest in a decade, the number of Americans without health insurance is at a record low, but stocks on Wednesday were up only modestly.
Even fundamental traders, those who trade based on the news more than on technical analysis of price charts, acknowledge that it's tricky to guess which direction a market will move in response to big news. Fortunately, short-term traders, particularly those using limited-risk binary options, can take on uncertainty without taking on the kind of risk other markets pose.
Even traders who want to act on nothing more than a hunch (though we wouldn't recommend it) can buy inexpensive binaries for $20 a contract or so, hoping to make $100 on expiration if they are right about the market's price movement. If you're going to take a risk based on a hunch, it's a good idea to have a guarantee that you can't lose more than you can afford.
A lot of traders will be taking positions in the next couple of weeks based on their sense of what the market "should" do in response to news like the Census report or announcements like the one the Fed will make on September 21. But only Nadex traders will do so with a guaranteed cap on their risk and the ability to choose, in advance, exactly what their maximum possible loss could be. That difference is what will make the next couple of weeks a different, but still exciting time for Nadex traders.
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