John Crudele

John Crudele

Business

Dow’s 326-point sell-off is a helluva hello for Yellen

Well, that’s a fine “how do ya do” for new Fed Chief Janet Yellen.

Before Madam Chairman was even sworn in, the Dow industrials were down 80 points and never really looked back from there, closing down a little more than 2 percent, or 326 points, to 15,372.80.

So should you be worried about stocks’ pummeling?

The answer you’ll get from all the folks on Wall Street with the growing circles of sweat under their armpits is, “Nah, stocks go up and down. This is an opportunity to buy shares more cheaply.”

That, I think, is an insanely stupid answer. But I hear it more and more when I tune in to financial-news cable stations.

So I’m going to say it again: The stock market was able to rise 30 percent in 2013 because of several forms of artificial prodding. Equities didn’t rise because corporate profits were superior or because companies were able to easily expand their revenues.

And Wall Street wasn’t cheering a booming economy. The US is still recovering only moderately, even if you can trust the statistics being put out by Washington.

The market, in short, was propped up— by both the Federal Reserve (because it didn’t have any better idea for stimulating the economy) and professional traders (who had their own selfish motives).

True, many regular people did benefit from the market’s rise. Now all these small investors need to do is get out before they lose all that they’ve gained. So does that mean you should sell stocks today or tomorrow?

Nobody knows the answer to that.

As you probably already know, the stock market is down nearly 7 percent since the beginning of 2014. And even though that’s nowhere near the 20 percent decline that’s normal in a market correction, the “experts” on Wall Street are already whining up a storm.

As long as the Fed was rigging the markets, Wall Street felt invincible.

But the stock market doesn’t feel like it has superpowers any more. And there’s no reason for small investors to behave like superheroes.


Stock prices roared last year, but job growth was poor.

That seems contradictory. When the stock market is going up — especially by 30 percent, as it did last year — shouldn’t companies become excited enough to expand their facilities and hire more workers?

Shouldn’t there be trickle-down optimism?

On Friday, the government will report its employment figures for January.

Right now I’d like to present my thesis on why the stock market’s blastoff in 2013 didn’t create many jobs.

In fact, I think the opposite was true: The rise in stock prices actually caused fewer jobs to be created.

If you are a Ph.D. student in economics, get out your notebooks. Whether you agree with me or disagree, this could be the guts of your dissertation.

Let’s go step by step through 2013. As I just said, stock prices soared, and there was hardly anything that could be described as even a minor correction in prices.

But Wall Street enthusiasm wasn’t really borne out by the economics of the year. Forget all the figures that are put out by Washington. As I’ve documented, they aren’t to be trusted.

Look at the actual earnings and revenue growth produced by the 500 companies that comprise the Standard & Poor’s 500 index.

At the beginning of 2013, Wall Street was predicting that earnings for these 500 companies would grow by an average 9.2 percent. When the year was over, profit growth was just 6 percent.

Even though it was disappointing, that 6 percent would have been worse if companies had not cut back expenses.

How do we know that’s what happened? Because revenue growth for those 500 companies during 2013 was a very weak 1.7 percent. At the beginning of the year, growth of 3.4 percent in revenues was expected.

So put yourself in the place of the corporate executives who make the hiring decisions at those 500 companies.

Remember also that most executives own stock in their companies, so they don’t want to see the price go down.

These execs see Wall Street jazzing their share prices higher — mostly because of Federal Reserve policies that were flooding the economy with liquidity. And these execs know — in real life and not on some theoretical level — that their companies are simply not performing up to the stock market’s expectations.

Yet they need to keep earnings as high as possible to justify the artificially high prices that Wall Street is assigning to their companies’ stock.

The only logical thing to do is keep costs down. And that means stifling hiring, among other expenses.

In equation form it goes something like this:

High Stock Prices + Corporate Exec Self-Interest in Keeping Price Up = Creation of Fewer Jobs.

Unfortunately, the reverse of that equations isn’t true: There won’t be more hiring just because stock prices are now coming down. In fact, those same corporate decision-makers are more likely to hire even fewer new workers if the stock market continues to misbehave.

It’s all about self-preservation and self-interest. The quicker stock prices come down, the faster spending cuts will need to be implemented.