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This week in Bidenomics: Upheaval

May 7, 2022
in Finance
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The job market is still hot, but other markets are not.

Stocks staged spastic swings this week, soaring on May 4 amid optimism about interest rates, then plunging as investors remembered there’s an array of other risks. The S&P 500 index is down nearly 14% in 2022, while the tech-heavy Nasdaq is down 22%. It’s turning into a lousy year for stocks.

Mortgage rates have surged to 5.3%, an increase of two-and-a-half points in just 8 months. They’re now at the highest levels since 2010. This could bring down home prices eventually and help with affordability, but so far it hasn’t. For now, home affordability is worsening considerably.

Even the hot job market has a downside. Remarkably strong employment growth continued in April, with employers creating 428,000 new jobs. But economists now want to see softer job creation, which would be a sign the Federal Reserve’s new effort to cool the economy and slow inflation is working. So far, there’s little sign of that. Superstrong job growth will keep upward pressure on wages, which firms will try to pass along to consumers via higher prices. With inflation at 8.5%, something needs to give, and it’s not clear yet what will.

Amid this market turmoil, a historic leak from the Supreme Court reveals the justices are poised to overturn the nationwide abortion protections codified in the 1973 Roe v. Wade decision. That’s not an economic issue per se, but it seems certain to intensify the nation’s political divisions, with implications for this year’s midterm elections.

The Roe turnabout also symptomizes the head-spinning upheaval President Biden is enduring just 15 months into his presidential term. When Biden came into office, there was no inflation to speak of and a robust post-COVID economic recovery just seemed to be getting started. The mass rollout of vaccines in 2021 set the stage for a return to normalcy, while Federal Reserve stimulus buoyed stock markets and sent interest rates to record lows.

Everything seems different now. Inflation is the dominant economic issue, and it portends deep trouble for Biden and his fellow Democrats in the November midterms. Economists think overall inflation may have peaked, with annual price gains moderating as the year-ago comparisons become more favorable. But elevated oil prices have ticked higher still, as Europe plans a phased embargo on Russian oil, which means gas prices, now around $4.30 a gallon, will probably go higher, too. This bums out consumers big-time and is a major factor in Biden’s low approval rating, which has been stuck in the low 40s all year.

[Follow Rick Newman on Twitter, sign up for his newsletter or send in your thoughts.]

The Federal Reserve raised short-term rates by half a point on May 4, as it telegraphed it would. Stocks soared after Fed chair Jay Powell said the Fed was not considering a three-quarter point hike in any single move, as if there was suddenly no reason to worry about rising rates. But that euphoria evaporated as new data showed a big drop in labor productivity and the European embargo on Russian oil took shape. The Fed, meanwhile, will probably keep hiking rates until they rise from 0.75% now to 3% or so.

The risk of a recession is rising, but most economists still think it’s unlikely, given that the unemployment rate is a super-low 3.6%. That’s not helping Democrats, however. Consumer confidence is at recessionary levels, and most political forecasters think Dems are likely to lose control of the House in November, with perhaps even odds they’ll lose the Senate as well. The odds could improve for Democrats if inflation improves quickly, which might allow the Fed to ease up on rate hikes, which would probably goose the stock market. But shortages of goods, homes, energy and even food don’t seem likely to ease any time soon, making inflation a persistent and unwelcome guest.

The Supreme Court’s formal ruling on Roe v. Wade will come in June. If the court does overturn Roe, as the leaked draft opinion suggests, it will doubtless have major political implications. A majority of Americans support keeping Roe in place, which means the high court is out of step with the public. Democrats who support abortion rights hope this could help them hold more seats in November, and maybe keep control of Congress. If so, Biden’s green-energy plan, which looks dead for now, might enjoy a rebirth. It’s possible Democrats could raise the corporate tax rate from 21% to 25% next year, and perhaps push taxes on wealthy individuals higher.

Democrats still face an uphill battle, however, and the most likely outcome is GOP control of at least one chamber, which would be the end of Biden’s legislative agenda. Like President Trump before him, Biden would be limited to regulatory and executive action for two years, with possible court challenges if he goes too far.

The Biden presidency could still settle down. A breakthrough in the Russia-Ukraine war would cheer markets and bring down energy prices. The Fed could corral inflation faster than expected. But there’s been little stability in the Biden economy so far, and it would be prudent to prepare for a volatile future.

Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman.

Read the latest financial and business news from Yahoo Finance

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