POITOU, FRANCE – Whoa! What’s this?
The Dow popped up nearly 400 points last Thursday. On Friday just 4% off its all-time high of 26,616, reached on January 26 of this year.
And you know what that means.
Markets are either going up or going down. According to Dow theory, a market goes down after it hits its high for the cycle.
We had previously predicted that the high on January 26 would be the peak of the current cycle, and that the “primary trend” for stocks would, therefore, be down for the foreseeable future.
We’re not sure Dow theory makes any predictive sense. After all, you might just as well say, “Prices go up… until they go down.”
But we like the drama of it… and the big-picture view it gives us. It helps us recognize the long, large sweeps in market history, and reminds us that the most important thing is to be in the right place at the right time.
The latest place to be was in U.S. stocks, which ran up from under 1,000 on the Dow in 1982 to the aforementioned all-time high in January.
You didn’t have to know anything more. You didn’t have to do any real research. All you had to do was get on that train in August 1982 and stay on board.
Of course, conductors get drunk… trees fall on the tracks… and trains run off the rails.
And the Ol’ Cannonball that pulls out of Washington’s Union Station at 6:07 a.m. for the run to New York’s Pennsylvania Station then turns around and goes the other way at 12:02 p.m.
Markets are not so regular or predictable. Still, after January, it looked like we were headed for a long ride back down the line.
But the financial press reports that two things emboldened investors yesterday and may have turned the train around – Walmart’s latest results and the upcoming trade talks with China.
Hmmm. We stop. We listen. We put our ear to the rail… trying to hear what’s coming down the track.
Walmart’s sales were up 4.5% year-over-year. But where did these sales come from?
People might spend more if they had more to spend. But despite the statistical noise on the subject, real wages – for the people who shop at Walmart – have gone nowhere.
Or to be more precise, the real average wage has risen – are you sitting down? – by a grand total of 13 cents an hour annually, since the beginning of this century.
Looking more carefully at the numbers, we find that the best-paid workers (those in the top 10% of wage earners) made progress; their earnings rose 16% since 2000.
Pew Research has more details:
In seasonally adjusted current dollars, median usual weekly earnings rose from $232 in the first quarter of 1979 (when the data series began) to $879 in the second quarter of this year, which might sound like a lot. But in real, inflation-adjusted terms, the median has barely budged over that period: That $232 in 1979 had the same purchasing power as $840 in today’s dollars.
That means that most people – including most people who shop at Walmart – haven’t had a real wage increase in 40 years. And with a more honest accounting for inflation, many must have actually lost real purchasing power.
Large, Long Trend
This is part of a large, long trend, too.
Perhaps the lack of real wage growth could be explained by stagnant productivity. If workers don’t produce more, why should they be paid more?
But since the mid-1970s, employee productivity has doubled, according to the government’s own calculations. That is, the average worker can produce twice as much in an hour today as he did in 1976.
Until then, productivity increases were shared between workers and capitalists, with the larger part going to the employees.
Since then, the workers have gotten none of the gains. Adjusted for inflation, wages are no higher today than they were in 1975.
Capitalists, meanwhile, are 25 times richer in gross terms (measured by the Dow)… and about three times richer in real terms. (More on those evil capitalists on Monday…)
And that’s using the feds’ calculations of inflation. Using a more honest adjustment (without the “hedonic” flimflam), in most places in America, the typical man today earns less real money than he did 40 years ago.
Nothing has happened recently that would change that trend. Most of the new jobs created are part-time in low-paying industries. And the direct benefits from the tax cut went to the wealthiest part of the population.
In fact, the trend has gotten worse.
As reported previously in this space, prices are now increasing faster than wages. Wages were said to be increasing – on average – by just 2.2%. This leaves the typical working stiff with less purchasing power.
Again, those are averages. For people who shop at Walmart, the numbers are probably worse.
So what’s behind Walmart’s higher sales? Why is it good news for investors, generally? Does it herald a stronger economy?
A clue in the Walmart earnings report was e-commerce data. Walmart’s e-commerce sales had jumped 40% year-over-year. With no real rise in incomes, those sales, too, had to come from other retailers.
This Reuters report may help; while Walmart rose, J.C. Penney fell:
Shares of U.S retail chain J.C. Penney sank below $2 for the first time on Thursday after it forecast a wider-than-expected full-year loss and posted disappointing results on the back of price cuts across product lines.
The company’s shares fell more than 20 percent to $1.92 in trading before the bell, its lowest since listing on the New York Stock Exchange a week before the launch of the Great Depression in 1929.
The company said it now expected a loss of between $1 per share and 80 cents per share, much bigger than its previously estimated range of a 7 cent loss to a 13 cent profit.
One goes up, another goes down. Overall, the economy won’t benefit. And it is no reason for a broad re-pricing of U.S. equities.
Everyday Low Prices
But there is something else going on… which brings us to the second alleged cause for joy: discussions with the Chinese.
So far, Mr. Trump’s trade war has succeeded only in raising consumer prices and increasing global tensions. Walmart gets its “everyday low prices” from China. It doesn’t help that China is “enemy number one” in The Donald’s trade war.
Price increases alone probably account for half of Walmart’s reported 4.5% hike in same-store sales. Further evidence comes from the fact that the company’s gross margins are actually shrinking.
Walmart is selling more… but making less on each sale. The company tries to keep customers happy and sales rising by squeezing its own margins.
But what if the Trump team actually does negotiate a better deal with China? Won’t that revive U.S. exporters? Aren’t the Chinese eager to buy “Made in America” Chevrolets and Fords? Will it help Walmart?
Not likely. Here, too, the trade deficit with China is part of a long-term trend. The Chinese make things cheaper… and often better. If they see something really selling in China, they knock it off and make their own version of it.
A trade deal is unlikely to change the trend. Before Trump’s trade war started, the World Bank put China’s average trade-weighted tariff at just 3.5%. Even if that went to zero, it wouldn’t have a substantial impact on the U.S. economy (although lower prices might help prop up Walmart and household consumption).
Besides, in Trump’s mind, you only win by making someone else lose. And free trade might benefit China’s export machine more than America’s consumption-dependent economy.
We doubt there will be any free trade agreement coming; we doubt Trump even wants one.
For now, we stick with our prediction: the primary trend is down. (Subject to change without notice.)