Dr. Rick Franza, Dean of the Hull College of Business, discusses a different, timely business topic each Monday in this column. This week, he talks about the economy and what’s driving the financial markets. The interview has been edited for clarity and impact.
ABD: We’re hearing some economic news that usually indicates strength but the financial markets are reacting as if things are bad. What is causing this disconnect?
Rick: There are always some differences between the economy and the markets. Part of that is in the economy we worry about now and the stock market is more forward-looking, so there’s always some disconnect between the financial markets and economic reality. But the disconnect seems to be worse than ever. There’s less correlation between the economic news and where the stock market goes.
We used to think that a good jobs report would make a good economy, and typically it does, but in the last couple of months when the jobs report was good, the market has tanked. People are reading it as the strong job market means inflation is not under control.
There’s a weighting of things. We used to see jobs and employment as the highest influence and now the thing having the largest weight on the market is inflation.
ABD: Last week we saw that happen, that right after the report on the August inflation numbers, the market experienced a record drop. People also related the market drop to a possible boost in the Fed’s interest rate. What is the correlation?
Rick: Before the inflation report last week, people were hoping that if it was lower the Fed might pivot and not increase the rate hike as much. But that’s clearly not going to happen. Higher interest rates will have an impact on consumer spending, which will reduce company earnings and so you’ll have lower stock prices.
ABD: The stock market has been going down steadily since the first of the year. Some people think that is driven more by fear than reality. What are your thoughts on that?
Rick: There’s definitely a fear element. I’ve felt it’s been going on for a number of years, that it’s based more on emotions than data. We have a lot of younger investors who haven’t seen many bad times in the market, so when they see bad things, they run for the hills. We’re also seeing people nearing retirement fleeing the markets.
ABD: Doesn’t that become a self-fulfilling prophecy?
Rick: If enough people think the markets will go down, they will go down. The disconnect between the economy and markets may be partly delusional – we just don’t know how to connect the dots. We don’t know what’s really influencing the stock market and even the experts argue about it. Part of the disconnect is that different elements affect different things at different times.
ABD: We often think of the stock market being something that affects only wealthy people. How does it affect the ordinary working class?
Rick: Most of us have some kind of investments, especially in retirement accounts. But the impact will be more on small businesses. The large businesses will find a way to weather the storm. If inflation continues and companies can’t be profitable, they’ll start laying off people. Then we’ll have a recession, which will reduce inflation.
If more companies go out of business, it’ll give us fewer choices, which means the supply chain will be restricted. Then, you’ll pay higher prices because of fewer options. In the long run, if the Fed sticks to its plan to keep raising rates, it will reduce inflation.
ABD: So how should we react to this information?
Rick: Don’t overreact one way or the other. Sometimes all this information can hurt you by hearing it so often and you’re more likely to make moves you shouldn’t. Part of it is how much risk you can tolerate. When people do projections on the economy, they come up with lots of different scenarios. We’re not going to be able to predict this, so look at the different scenarios out there and evaluate the risk you can tolerate. It’s a challenge – right now, everyone is losing money.
