Why Main Street shouldn't sweat Wall Street's woes
Despite seasonal tailwinds and lingering holiday cheer, global markets reopened on Monday, tripped over their toes and promptly fell flat on their faces.
Investors were spooked by a combination of factors, from a 7 percent drop in Chinese stocks that halted trading to weaker-than-expected manufacturing data. Adding to the worries are new tensions between Iran and Saudi Arabia after Riyadh executed a well-known Shiite cleric and the retaliatory burning of the Saudi embassy in Tehran.
But here's the thing: While the worldwide stock swoon that followed China's market downturn clearly isn't a sign of global economic health, it isn't the final word on the health of the U.S. economy.
Steady job growth, cheaper goods and energy, and the appearance of long-awaited wage inflation are. And we could get all of these, despite stock market volatility, in the New Year. That's because if job growth stalls, the Federal Reserve, which just raised interest rates for the first time since 2006, will be forced to respond.
Stepping back a moment, you can see some larger issues are in play, from falling corporate profitability to slowing U.S. economic data, a stronger dollar and crumbling energy prices. All of these are negatives for the stock market. Yet they may not necessarily be negatives for middle-income Americans.
Investors are nervous about the start of the fourth-quarter earnings season on Jan. 11, when Alcoa (AA) kicks things off. That's because cheaper crude oil and weak foreign earnings for U.S. corporations (due to the greenback's strength) are, according to FactSet, about to give the S&P 500 its third consecutive quarter of lower earnings -- something not seen since the financial crisis.
Yet cheaper imported goods and cheaper gasoline prices are clearly positives for consumers. In other words -- and in what is likely to be a major economic theme for 2016 -- what's bad for Wall Street may not be bad for Main Street.
Especially since just a cursory look at the Fed's Survey of Consumer Finances shows that equity ownership is concentrated in the upper echelons in terms of wealth and income. And that's especially so because we're in the midst of a long shift of wealth from wage earners to corporate profiteers -- a shift that's overdue for a reversal.
We'll know more when the December employment report is released on Friday. Capital Economics is looking for a gain of 210,000 positions and enough of an increase in average hourly earnings to push the annual wage inflation rate to 2.8 percent, which would be a five-year high.
To be sure, investors (especially older, more conservative ones) should be taking necessary measures to protect themselves from what's likely to be a bumpy ride in the markets in 2016. But for everyone else, especially young workers without much of a retirement portfolio, job gains and juicy pay hikes should overshadow the Dow's decline.
