US stocks slipped Friday after a third weekly gain, as June retail sales numbers from the Commerce Department exceeded expectations, giving hope for ongoing growth in the world's largest economy.
By Vikram Rangala
Friday, July 15, 2016
The latest issue of The Economist points out that despite the gloomy pronouncements of some candidates in the current election campaign, the US is actually enjoying low unemployment, record-high stock prices, and one of the longest periods of sustained economic growth in its history. While the problems created by systemic inequality are real and serious, they took decades to get this bad and don't negate the positives.
The markets' rise in the past few weeks seems to acknowledge that the US economy is, in fact, getting stronger by several measures. The unexpectedly high nonfarm payroll number from June was one such sign. And in a way, the stock market's own rise to new record highs is fueling the stock market's bullishness.
Rallies sometimes get propelled that way: the market rallies because it is inspired by the stock market's rally.
Bubble effects like that are short-lived and easily reversed. Friday's profit-taking is a sign that some investors, at least, are looking to take some of their risk off the table before the current enthusiasm wanes.
Beyond those short-term factors, however, are some long-term factors that are positive as well as a few that may be negative for the US economy.
The negative includes some $8 billion or more in investments held by big banks like Goldman Sachs and JP Morgan, which they are required to sell by June of 2017. Part of the Dodd-Frank Act was the implementation of the so-called Volcker rule. A part of that rule was the restoration, to some extent, of the old separation of banking from speculation which the Glass-Steagall Act of 1933 put in place to stop banks from taking too many risky investments and endangering the funds of their depositors.
That speculation was a big reason for the crash of 1929 and a big reason, in a different way, for the crash of 2007-2008. The deregulation of the 90s and early 2000s allowed banks to start playing the markets again. Dodd-Frank put some curbs on it and the restoration of the wall between speculation and banking is entering its final phase in the coming months.
In short, that means that the biggest banks must now sell their holdings in big hedge funds and other investments. Their challenge is doing it without taking losses on those investments and not triggering wider selloffs. The market hasn't seen a concerted selloff like this before and those shares will be a part of every major move for the next year.
On the positive side, unemployment in the US is below 5% and now, we have a clear sign that consumers feel good enough about their job security that they are shopping. For better or worse, America's economy is consumer-driven. It is the buying by average people that fuels it.
This is why raising the minimum wage has a stimulating effect every time it happens. With many states and municipalities (not to mention Starbucks) headed towards increasing their minimum wages to $12 and $15, more consumers will find themselves with more disposable income.
Unlike the rich, who tend to sock increased income away into investments, the poor and middle class spend it. Not recklessly for the most part. People do things like replace aging cars, get contact lenses in place of their old glasses, and take long overdue family vacations. In other words, they stimulate the economy.
The businesses where they spend, in turn, get more income and use it to expand, hiring more people and raising wages for their current employees. When consumer spending goes up under conditions of low unemployment—as it is now—it usually means a virtuous circle is at work: people with jobs are spending money with the confidence that their incomes are secure enough that they can afford it.
That's an economic sweet spot that all countries aspire to and the US seems to be enjoying, at least in the near-term. The markets seem to be taking notice. Even if they sell off as they often do in late July and early August, the markets still have a good chance of doing what they usually do in an election year: rise steadily into November and then rally after the election.
We may well see that traditional post-election rally even if the winning candidate is the one who repeatedly says the country is "going down fast."
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