January 8, 2016
The stock selloff is happening in a parallel universe
Do we all live in China now? Investors could be excused for thinking that, given that arcane indicators such as a Chinese manufacturing index and the value of the Chinese yuan are inducing nauseating drops in the U.S. stock market — the Dow Jones Industrial Average closed nearly 400 points lower Thursday. And the surprise halt to trading in the latest Chinese session, a mere 30 minutes after markets opened, has thrown U.S. and European markets into a tailspin.
Last we checked, however, the Dow Jones and S&P 500 indexes were composed of U.S. companies that might do some business in China, but still earn the vast majority of their revenue elsewhere. And elsewhere, economic fundamentals are looking way better than the gloomy start to this year’s trading would suggest.
The U.S. economy will probably grow around 2.5% this year, which isn’t great, but is a sustainable pace that seems nowhere near overheating. The economy can progress at that measured pace for a long time before the next downturn occurs. Here’s some more good news about the U.S. economy:
* Employers have been creating an average of 220,000 new jobs per month for the last year. That robust pace seems likely to continue when the latest job numbers come out on Friday.
* Layoffs are at very low levels, according to outplacement firm Challenger, Gray & Christmas. Most workers have good job security, which boosts confidence.
* Car sales are on fire, hitting record levels in 2015. Purchasing a car is a big financial commitment, one U.S. consumers are obviously comfortable making.
* American homeowners have recovered nearly all the equity lost during the housing bust. Overall net worth, which also includes financial assets, is close to record levels.
* The once-demolished housing market is stable again, with modest price increases, low mortgage rates, loosening credit standards and more inventory coming on the market.
Meanwhile, things are improving in Europe as well, though more slowly than here at home. Euro-area unemployment is inching down, confidence is improving and a string of back-to-back recessions appears to be over. Greece, the biggest source of financial turmoil in Europe, is back in the convalescent ward, with an ugly but workable bailout in place.
Nobody thinks the U.S. or European economies are in high gear, and bears point to weakening corporate profits, tighter monetary policy by the Federal Reserve and a shrinking share of adult Americans who are even in the work force. All valid reasons for caution—but not for plunging markets. “As far as the domestic economy is concerned, we see growth continuing,” Wells Fargo wrote in a recent note to clients. “Downside volatility caused by fear and uncertainty creates buying opportunities, in our opinion.”
It takes an iron stomach to buy stocks when markets are falling, of course, but it’s easier to take a look around, assess whether your local economy seems imperiled, and if it’s not, relax. Markets don’t always reflect real economic performance, but they do experiment with rationality now and then.
Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.