I am not an economist, professionally involved in any aspect of the financial sector, or even a particularly good investor. I am lucky enough to have some money that is invested in securities. Recently I have been devoting some of my attention to the U.S. based markets in addition to my normal pre-occupation with the economic well-being of people.
Based, I have concluded is a very important word. The market indexes reported micro-second by micro-second that appear to be American like the Dow, the S&P 500, and NASDAQ are all based here in the U.S. The companies represented in those indexes are based in the U.S. The way those companies make money is only partially based on how the U.S. economy is going and even less based on how individuals are doing economically.
Profits come from all kinds of things that are not helpful to U.S. citizens. Productivity gains generally equate to reduced needs for labor and lower labor costs per employee. The game for corporations seems to be to try to stay stable in the U.S.; growth here appears to be secondary to corporate well-being. As long as corporations more or less hold the line here, the profits made outside the U.S. can go straight to the bottom line. The more corporations create both increased supply and increased demand outside our country the better for them, and the better for the markets.
For example, over the last few weeks there have been three events that I thought might have major impacts on those market indexes. The unsettled election results in Italy caused a brief but dramatic plunge. The good news from China today has generate a nifty upward surge. The sequestration of the U.S. Budget had no discernible impact whatsoever. It is that last one that worries me because I think it is deceptively deceptive.
The explanations I hear most frequently for why the markets have shrugged their shoulders at sequestration are twofold. I hear that the markets have already factored in sequestration because markets anticipate the future; I believe that principle is correct. I hear that the markets will not take sequestration seriously until we get farther down the line and find out whether or not it will stall the U.S. recovery, including wage and employment stagnation or decline. That second one I am not so sure about.
I do not understand how the loss of hundreds of thousands could not hurt people. However, I believe that securities markets will be able to tolerate a rather broad range of failure or success when it comes to those trends in the U.S. economy. Our economy has become a much smaller piece of what creates corporate value for U.S. corporations. Within our domestic economy the interests of corporations are not very closely aligned with the interests of individuals.
Domestic employment data, domestic consumer confidence and demand are important factors and could eventually have an effect on the markets. But what is the deviation required for them to become highly significant to corporate profit? I don't know and I worry that it has to be a lot bigger than many of us think.
Conclusions? If you have investments in securities markets watch them carefully, but don't assume they are closely linked to how well the people of the United States are doing economically. If you are concerned about how well the people of the United States are doing economically, do not look to the markets and their indexes as barometers.
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