Most of the financial reporting regarding the recent stock market blames the fear of inflation for the sell off of stocks. I doubt it. Interest rates have been rising for 18 months with the fear of inflation a constant concern. Gradual increases in inflation will affect profits, but not cause a sudden sell off, especially when inflation has been assumed for quite some time.
The real reason for the sell off of stocks is the uncertainty regarding immigration legislation. The word “comprehensive” may sound reassuring to voters who are sure to get something they like along with some things they don’t like, but this word creates fear and uncertainty for investors who don’t have a formula for calculating the affects of all of the changes.
If comprehensive legislation regarding immigration becomes law, the stock market will recover slowly as the changes are evaluated and adjustments to corporate policy are made. If strong border enforcement becomes law without other changes, look for continued selling in the stock market. If a compromise can’t be reached and there is no new immigration law, look for a rapid recovery in the stock market.
Of all of the options, I prefer letting this effort pass without any new laws. From the beginning this has been a solution looking for a problem. People who come to America to work are not a problem. People who come to America to take advantage of government handouts are not a problem, but the government handouts are a problem. Stop the government handouts for everyone and the illegal immigrants will find jobs or go home. People who come to America to break the law are the same problem as people born in America who break the law. Building a few good prisons would be much more cost effective than building a wall and enforcing the American borders.
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4 comments:
David:
Which is the more unlikely: elimination of government programs that are either legislatively designed or judicially mandated to cover illegal aliens; or,
the Senate/House conference committee sending President Bush immigration legislation that is primarily "enforcement first"? [I've checked the long-range weather and nobody is forecasting Hell freezing over.]
I do think you are on to something regarding the stock market reflecting investor uncertainly over immigration policy. But as for me and my portfolio, I hope for "enforcement first" and let the market fall where it may.
Derek Simmons
Hi Derek,
I hear and read a lot of prognostication on the destruction of America if any type of amnesty is granted. However, hell will not freeze over regardless of how much amnesty or how much enforcement is written into new laws. Neither of your scenarios is very likely at all. President Bush will not get a bill to sign without some type of amnesty or guest worker program and our government will not end welfare as we know it. Wouldn’t you feel cheated if I ever advocated something in government that was imminent?
I totally respect your view regarding your portfolio. I feel the same way. My objective in life is to always do what is right and leave the outcome to our creator. I didn’t mean to imply Americans should design immigration or any other policy for the purpose of increasing the value of the stock market. I just wanted to describe how I thought the two are related and will be related depending on the outcome of the immigration legislation.
While your blog looks really interesting, and you seem to be a very insightful guy, I'd take issue on the immigration bill's effect on the stock market. The large-capitalization companies that most affect the stock indexes have global workforces.
If I had to choose the biggest factor, it would the fear that higher gas prices and mortgage rates dampen consumer spending.
Not for nothing has the tech and retail stocks lead the decline. (OK, the retail companies do have a mostly domestic workforce, so you have a point there)
Hi Rick and Gary,
Last month I wrote a piece explaining how Fortune 500 companies aren’t affected by immigration policy. You can read it here.
However, the interests of Fortune 500 companies are not exactly the same as the interests of investors in the stock market. Long term, Fortune 500 companies will be fine, but short term there is a lot of uncertainty affecting investment decisions. Of course I could be wrong, but the recovery in stocks the last two days after the silly Senate bill I think proves my point.
Certainly, consumer attitudes and consumer earning and spending affects the outlook for companies doing business in America and will also affect the stock price. Gas prices are a tough call though because for every consumer paying more, there is a gas supplier who is making more.
Thanks for stopping by and leaving a comment.
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