🗣Stock Market Strength DOES NOT Mean a Strong Economy
The stock markets have been a roller coaster of historic peaks and lows over the last few months.
The markets surged to pre-pandemic highs, but then tumbled back down — the Dow slid 800 points in one day.
Yesterday, the S&P 500 advanced 1.6% in morning trading. The Dow Jones Industrial Average climbed 334 points, about 1.2%.
Although in the past week, the NASDAQ suffered its biggest one-week decline since March, as of yesterday it has jumped 2.1%. And today it continues marching higher on back-to-back sessions of gains.
Many people, including President Trump, are quick to point to the stock market recovery and say, “the economy is doing great!”
They look at the S&P Index’s rise of 4.3% — even after its recent drop — and assume that the economy is on the mend.
However, is it really correct to make this comparison between the overall health of the economy and the state of the stock market?
Today we argue that this is a hasty — and dangerous — comparison.
Who Actually Owns Stock?
Former Federal Reserve Chair Janet Yellen put it best when she explained: “The stock market isn’t the economy. The economy is production and jobs, and there are shortfalls in virtually every sector . . .”
You may question this. You may think that if the stock market has remained so resilient, even in the midst of months of economic shock, then it must be the most accurate indicator of the state of the economy.
However, this is where a misconception about equality lies.
The reality is that stocks are owned mostly by the wealthy upper percent of the population.
According to a Gallup poll, roughly 55% of Americans own stock, but ownership is heavily skewed toward the wealthy.
Federal Reserve data shows that the top 1% of U.S. households own 52% of equities and mutual fund shares, and the top 10% own 87% — which leaves the U.S. workers in the bottom 90% owning just 13%.
What does it mean when half the country doesn’t even own stock and small “mom and pop” businesses can’t handle the same economic stresses that big companies can?
It means that wealthy Americans can continue to speculate even as unemployment hovers at 8.4%. The spring’s temporary job losses — initially caused by the shutdowns — are settling into a long-term pattern of economic depression that could reduce low-income and middle-class families’ income for years to come.
Ultimately, all this shows is that the wealthiest people are doing just fine during the greatest recession since the Great Depression.
What Makes Up The Stock Market?
Another key element to note is that the stock market largely reflects only the biggest U.S. companies.
The S&P 500 literally comprises the 500 largest companies in the country.
Within these 500, a key five companies have largely been driving the stock market gain we have been seeing.
These companies are Apple, Amazon, Microsoft, Facebook and Google’s parent company, Alphabet.
These five companies represent more than one-fifth of the roughly $27 trillion in total market capitalization of all companies in the S&P 500.
Conversely, the Russell 2000, which tracks “small-cap” U.S. firms — those with an average value of about $2 billion — is down around 8 percent.
Who Does Federal Aid Help?
No matter the size of the company, they need customers.
But when overall demand sinks, wouldn’t that be reflected in share prices?
The answer, in part, is that fiscal policies enacted by Congress and monetary policies put in place by the Federal Reserve this spring have disproportionately benefited corporations.
The Federal Reserve announced in March that it would pump several trillion dollars into the financial markets by continuing what it calls “quantitative easing” — purchasing assets directly in the financial markets to support asset prices — while also buying about $1 trillion worth of bonds from big companies either directly or indirectly in secondary markets.
These trillions of dollars are supporting everything from junk bonds to real estate investment trusts to private equity firms.
Even as federal unemployment benefits have expired these financial-market stimulus efforts continue.
Although this may be working as a temporary solution, virtually limitless support for U.S. financial markets won’t save the real economy from a continuing recession.
Propping up asset values can temporarily keep the financial crisis at bay, but can’t deliver the broad economic stimulus needed to bring unemployment figures down or protect small businesses and workers.
And small businesses and consumers are the backbones of economic growth.
Do you see what’s wrong with this picture?
Small businesses are going bankrupt.
Low and mid-level renters are fighting looming evictions as the moratorium ends and they remain unemployed.
Workers in the hardest-hit industries, such as airlines, hotels and retail, are just now losing their jobs and are facing less federal financial support than was doled out in the Spring.
All while big corporations are thriving and the wealthiest are becoming even wealthier.
All while Amazon announces it’s looking to fill 33,000 corporate and technology jobs over the next few months.
All while big tech adds billions of dollars to their market capitalization.
Will big companies be immune to the financial devastation in the coming months?
What happens when consumer spending slows to a point that it affects even the largest companies?
What happens when companies like Facebook start announcing layoffs and bankruptcies increase?
Jerome Powell, chair of the Federal Reserve, has repeatedly said that his institution can’t keep equity and debt assets propped up if the economy continues to deteriorate.
And as we have thus proven, the health of the economy is a separate beast from that of the stock markets.
At some point, even those on top will feel the grips of the recession.
To a Richer Life,
The Rich Life Roadmap Team