Market moves usually don’t speak with one voice and are best ignored in favor of the fundamentals. But when the stock market pulls a major sell-off, as began Monday and continued today, it’s best to pay attention.
The short answer, that stocks have been dragged down by energy shares because of falling oil prices, is too glib. What about all the benefits “to consumers” we were promised from falling oil prices, and presumably to companies that depend on them?
As I warned almost a month ago, the United States is vulnerable to the oil-price fall for a variety of reasons, especially because we are a major oil producer ourselves and because of all the debt — much of it in junk bonds — tied up in fracking plays. The oil sector had been one of the few undeniably strong points in the economy in recent years, providing growth in well-paid jobs in several states (albeit with heavy cost to the climate). Now that’s fading, yet similar good jobs aren’t emerging.
And it’s contagious. Today US Steel announced more than 600 layoffs at its Lorain, Ohio, plant that makes pipe for the oil industry. A more worrisome scenario is what happens if major defaults start working their way through the energy sector. Remember, fracking was only economically viable with expensive oil. In the traditional oil patch, low prices will take out low-value “stripper wells” and fracking plays, too. More jobs gone. And don’t forget oil stocks, which had done so well, are widely held by pension funds.
There’s an intriguing question of how the Wall Street boyz and speculators worldwide have played this and accelerated the effects. A column for another day.
So if the market is “telling us” something, it’s partly about the tectonic effects of the drop in oil prices. But in the greed-or-fear motivation of The Street, the latter is widespread:
- Oil reflects a broader decline in commodity prices, not because the world economy is doing so well but because it is slowing significantly. Europe, China, Japan and major oil producers are all facing trouble.
- The new eurozone crisis seems like deja vu all over again, but a Greek exit from the common currency might not be as “manageable” as the Germans think. This also complicates efforts by the European Central Bank to undertake QE to raise the economy.
- As usual, world capital seeks refuge in U.S. Treasurys and accumulating U.S. dollars. The downside: a major headwind for American exporters, a special concern for a state as trade dependent as Washington.
- Even as the above happens, there’s a question about what will happen with Republicans controlling both houses of Congress. The House GOP was willing to shut the government and even default on our debt — a depression-causing event — in its brinksmanship with President Obama. Will the GOP Senate be as reckless? At the least, the next year will see continued austerity, except in certain pet areas such as subsidies for favored industries and war.
- This is the year when the Federal Reserve will be tested on its return to normal central banking from the recessionary QE. Almost all post-World War II recessions were caused, deliberately or not, by Fed policy changes.
So although U.S. output grew at a smoking 5 percent in the third quarter last year and the labor market is healing, many swans are swimming, black, white and gray. It is a fragile time for an aging recovery and bull market.
Today’s Econ Haiku:
Yes, there will be blood
You thought it was a movie
Roll out the barrells