As you fret over the stock market, the economy keeps chugging along

As you fret over the stock market, the economy keeps chugging along
© Getty Images

Over the last few days, the U.S. and world stock markets have been falling. All but a handful of international markets were in the red. In fact, at one point on Monday, the Dow Jones Industrial Average was down 1500 points — the worst intraday fall in the history of the index. We have also nearly wiped out the gains we made since the beginning of 2018.

There are many narratives for the causes of the drop.

ADVERTISEMENT

One narrative is that the strong labor market report may be causing fears of inflation and subsequent action by the Fed to raise interest rates. Another is the spike in the CBOE Volatility Index which may raise concerns of uncertainties about the future and investors are choosing to cash out and sit on the sidelines.

 

Yet another is the rising Treasury yields are allowing investors to rebalance their portfolios, moving away from risky stocks to less risky bonds while still earning decent returns. One more narrative is that of investment community “testing” the new Fed chairman, Jerome Powell, on his first day in office.

Other explanations include the use of the word “further” in the latest Federal Open Market Committee statement, the Wells Fargo settlement, algorithmic trading computer programs, and the list goes on.

While some narratives may be more true than others, none of these explanations are mutually exclusive and may even be correlated and reinforce one another.

In fact, the coordinated plunge in the global markets comes at a time of coordinated global economic growth. For the first time in decades, we are in a sweet spot where the world economies are growing and expected to continue to grow in tandem. 

Indeed, the U.S., Japan, Europe, China, India and most other economies are growing faster than expected.

In the U.S., the most recent Institute of Supply Management Non-Manufacturing Purchasing Managers' Index is up, housing starts are up, home prices have been steady while home affordability remains manageable, consumption growth is at a decent pace, the unemployment rate is low, wages are rising and inflation remains low.

This all indicates that despite the ups and downs of the stock market, the economy is steadily growing, and most Americans are doing well. 

So why do we pay so much attention to this one indicator? 

Most individuals do not actively trade in the stock markets beyond their exposure through their retirement savings accounts. The major part of Americans’ household wealth is their homes, i.e., residential real estate, and their human capital. Yet, we do not track and report on home price indices or wage fluctuations on a daily basis.

Following the stock market has, however, become a pastime for many. Starting with the president, who touts the stock market gains on a regular basis, to the media providing commentary that makes watching the stock market as exciting as watching an NFL game, down to the average person, who “feels” richer watching the stock market tick upward.

It is okay if this remains a spectator sport. It is not okay when individuals start consuming more because they have “paper gains” and feel rich. This is analogous to people who had significant gains in their home prices and then used their houses like ATMs, withdrawing equity to consume their unrealized wealth. When housing prices fell, they became severely indebted. 

Instead of spending energy touting stock market gains and fanning the consumer in Americans, perhaps we should focus our attention and energies on how to keep our economy going and ensure Americans continue to do well for as long as possible.

Our national debt has just gotten larger partly due to the recently passed tax cuts. In fact, the Treasury Department expects to borrow nearly $1 trillion this year, roughly double what the government borrowed in fiscal year 2017.

This comes as the Fed works to reduce its balance sheet by borrowing less, so the Treasury Department has to borrow more from the public and investors. Is there enough demand for all this debt? Will all this government debt lead to inflation that is higher than our economy can handle?

Can the tax cuts generate enough economic growth and revenues for the government to pay off this debt? What is the impact of this ballooning debt on our economic prosperity.

Surely these issues deserve more attention than watching the stock market. Else, what might just be a minor stock market tantrum could become a major dent that does real damage.

Sumit Agarwal is the William G. Droms Term professor of finance at Georgetown University’s McDonough School of Business and author of the recently published book, "Kiasunomics: Stories of Singaporean Economic Behaviours." Cheryl Lim is a Ph.D. candidate in finance at the EDHEC Business School.