Why the Stock Market is Irrelevant as an Economic Recovery Indicator
Wall Street’s rapid recovery — even as 28 million Americans remain jobless — is a sign of something profoundly amiss in the economic system.
I read a decent brief article in the Wall Street Post about the fact that the stock market is disconnected from the economy and is an inappropriate economic indicator. It also talks about how the Federal Reserve (the Fed) is propping up the stock market and could let it drop overnight if the Fed stops infusing the stock market with billions/trillions in cash by buying up corporate bonds. The concepts are straightforward, and help explain my own belief that we are very, very, very far from economic recovery.
For now, I’m just going to pull excerpts directly from the article and then use this post as reference material later when I write more fully on the Trump-induced economic depression. At any rate, the following info is pulled directly from David J. Lynch’s article “As stock prices hit record high, economy trails behind,” in the August 18, 2020 edition of the Wall Street Post.
The stock market captures only the fortunes of publicly traded companies, those that are owned by individual and institutional shareholders. Most of the businesses that Americans patronize on a daily basis — local restaurants, dry cleaners, hardware stores — are not part of the major market indexes: the Dow Jones industrial average, the S&P 500 and the tech-heavy Nasdaq.
All of the companies in the S&P 500 combined, for example, employ less than one-fifth of the nation’s 140 million workers. Small businesses, which have been devastated by the pandemic, account for almost one-half of private sector employment, according to the Small Business Administration.
The S&P 500’s ascent also doesn’t mean that the whole stock market is rising. Since the index gives greater weight to companies with the largest market value, just 10 companies account for 27 percent of its value, according to Silverblatt.
In practice, the index is being driven higher by a relative handful of prominent technology companies, including Apple, Alphabet, Microsoft, Amazon and Facebook.
“The idea that the stock market is the economy and the economy is the stock market — the correlation between the two is tenuous, at best,” said Barry Ritholtz, whose N.Y.-based firm manages $1.5 billion in assets.
“The index isn’t the real world,” Ritholtz said.
Despite talk of a market and economy that are at odds, investors are not indiscriminately lifting all stocks. Industries that have been badly damaged by the pandemic — such as airlines and hotels — are doing poorly while those that have retooled for socially distanced operations are thriving.
Through Aug. 17, the information technology and consumer discretionary sectors were both up more than 20 percent this year, outperforming the broader market. Providers of videoconferencing software, cloud computing platforms, communications services as well as online retailers are prospering from the shift of tens of millions of Americans to remote work.
Energy companies, down more than one-third, and financial institutions were lagging.
Even within sectors, investors are flocking to companies that have adapted and shunning those that haven’t. Target’s stock is up almost 10 percent this year, reflecting its ability to stay open throughout the pandemic, while shares of Kohl’s, which closed all of its 1,159 stores for several weeks beginning March 20, have lost roughly half their value.
“There’s always a difference between the market and the economy,” said Howard Silverblatt, senior index analyst for S&P Dow Jones Indices in New York. “We’re up because we’re looking past 2020 and looking at 2021.”
The market also is benefiting from massive monetary stimulus by the Federal Reserve, which has added $2.8 trillion to its balance sheet during the pandemic. The money supply has increased by 22 percent over the past year, the fastest rate in history and twice the pace of the inflationary 1970s, according to Richard Bernstein, an investment manager in New York.
“I don’t think people understand this money supply growth is so far off the charts, we don’t have anything to compare it to,” he said.
That’s precisely what worries some analysts. The International Monetary Fund warned in June that the gap between asset prices and fundamentals was “near historic highs,” leaving the market exposed to a calamitous sell-off that could lengthen the recession.
Stock prices relative to company sales also are now higher than just before the tech bubble popped in 2000, according to Peter Boockvar, chief investment adviser for the Bleakley Advisory Group.
“This is a highly expensive market … egged on by the Fed. It will last until it doesn’t,” he said.
Bernie Sanders, two-time Democratic presidential candidate, earlier this month criticized Fed actions that backstopped financial markets, saying they aided billionaires at the expense of the working class. “We are currently witnessing what is likely the greatest transfer of wealth from the middle class and the poor to the very rich in the modern history of this country,” he said on the Senate floor.
Likewise, Senate Minority Leader Charles E. Schumer (D-N.Y.) attacked the president’s proposal for a cut in the capital gains tax, saying it would benefit only “wealthy investors.” One-quarter of all stocks are held in taxable accounts, according to Steve Rosenthal of the nonpartisan Tax Policy Center.
The president, who often cites rising stock prices as validation of his performance — and dismisses them when they fall — has latched onto Wall Street’s recent gains.
“The stock market’s rebound signals a ‘V’-shaped recovery, stronger than our competitors anywhere in the world,” Trump said at the White House on Wednesday. “We had to turn off the economy, and now we’re turning it back on, and that’s beyond a ‘V’ shape. This is going to be very strong; it’s called a “strong ‘V.’ “
But real-time data on spending and employment instead show that the economic recovery has plateaued in recent weeks as Congress and the administration failed to reach a deal on new emergency funding.
The expiration of the extra $600 in weekly unemployment benefits will provide a new test for the economy and the stock market, which also faces the danger of a renewed surge of coronavirus infections this fall as well as the presidential election.
To many Americans, Wall Street’s rapid recovery — even as 28 million Americans remain jobless — is a sign of something profoundly amiss in the economic system. The gains from rising stock prices go disproportionately to the well-off: 84 percent of American households with an annual income of $100,000 or greater own stocks vs. 22 percent of those making $40,000 or less, according to a recent Gallup survey.
I read a decent brief article in the Wall Street Post about the fact that the stock market is disconnected from the economy and is an inappropriate economic indicator. It also talks about how the Federal Reserve (the Fed) is propping up the stock market and could let it drop overnight if the Fed stops infusing the stock market with billions/trillions in cash by buying up corporate bonds. The concepts are straightforward, and help explain my own belief that we are very, very, very far from economic recovery.
For now, I’m just going to pull excerpts directly from the article and then use this post as reference material later when I write more fully on the Trump-induced economic depression. At any rate, the following info is pulled directly from David J. Lynch’s article “As stock prices hit record high, economy trails behind,” in the August 18, 2020 edition of the Wall Street Post.
The stock market captures only the fortunes of publicly traded companies, those that are owned by individual and institutional shareholders. Most of the businesses that Americans patronize on a daily basis — local restaurants, dry cleaners, hardware stores — are not part of the major market indexes: the Dow Jones industrial average, the S&P 500 and the tech-heavy Nasdaq.
All of the companies in the S&P 500 combined, for example, employ less than one-fifth of the nation’s 140 million workers. Small businesses, which have been devastated by the pandemic, account for almost one-half of private sector employment, according to the Small Business Administration.
The S&P 500’s ascent also doesn’t mean that the whole stock market is rising. Since the index gives greater weight to companies with the largest market value, just 10 companies account for 27 percent of its value, according to Silverblatt.
In practice, the index is being driven higher by a relative handful of prominent technology companies, including Apple, Alphabet, Microsoft, Amazon and Facebook.
“The idea that the stock market is the economy and the economy is the stock market — the correlation between the two is tenuous, at best,” said Barry Ritholtz, whose N.Y.-based firm manages $1.5 billion in assets.
“The index isn’t the real world,” Ritholtz said.
Despite talk of a market and economy that are at odds, investors are not indiscriminately lifting all stocks. Industries that have been badly damaged by the pandemic — such as airlines and hotels — are doing poorly while those that have retooled for socially distanced operations are thriving.
Through Aug. 17, the information technology and consumer discretionary sectors were both up more than 20 percent this year, outperforming the broader market. Providers of videoconferencing software, cloud computing platforms, communications services as well as online retailers are prospering from the shift of tens of millions of Americans to remote work.
Energy companies, down more than one-third, and financial institutions were lagging.
Even within sectors, investors are flocking to companies that have adapted and shunning those that haven’t. Target’s stock is up almost 10 percent this year, reflecting its ability to stay open throughout the pandemic, while shares of Kohl’s, which closed all of its 1,159 stores for several weeks beginning March 20, have lost roughly half their value.
“There’s always a difference between the market and the economy,” said Howard Silverblatt, senior index analyst for S&P Dow Jones Indices in New York. “We’re up because we’re looking past 2020 and looking at 2021.”
The market also is benefiting from massive monetary stimulus by the Federal Reserve, which has added $2.8 trillion to its balance sheet during the pandemic. The money supply has increased by 22 percent over the past year, the fastest rate in history and twice the pace of the inflationary 1970s, according to Richard Bernstein, an investment manager in New York.
“I don’t think people understand this money supply growth is so far off the charts, we don’t have anything to compare it to,” he said.
That’s precisely what worries some analysts. The International Monetary Fund warned in June that the gap between asset prices and fundamentals was “near historic highs,” leaving the market exposed to a calamitous sell-off that could lengthen the recession.
Stock prices relative to company sales also are now higher than just before the tech bubble popped in 2000, according to Peter Boockvar, chief investment adviser for the Bleakley Advisory Group.
“This is a highly expensive market … egged on by the Fed. It will last until it doesn’t,” he said.
Bernie Sanders, two-time Democratic presidential candidate, earlier this month criticized Fed actions that backstopped financial markets, saying they aided billionaires at the expense of the working class. “We are currently witnessing what is likely the greatest transfer of wealth from the middle class and the poor to the very rich in the modern history of this country,” he said on the Senate floor.
Likewise, Senate Minority Leader Charles E. Schumer (D-N.Y.) attacked the president’s proposal for a cut in the capital gains tax, saying it would benefit only “wealthy investors.” One-quarter of all stocks are held in taxable accounts, according to Steve Rosenthal of the nonpartisan Tax Policy Center.
The president, who often cites rising stock prices as validation of his performance — and dismisses them when they fall — has latched onto Wall Street’s recent gains.
“The stock market’s rebound signals a ‘V’-shaped recovery, stronger than our competitors anywhere in the world,” Trump said at the White House on Wednesday. “We had to turn off the economy, and now we’re turning it back on, and that’s beyond a ‘V’ shape. This is going to be very strong; it’s called a “strong ‘V.’ “
But real-time data on spending and employment instead show that the economic recovery has plateaued in recent weeks as Congress and the administration failed to reach a deal on new emergency funding.
The expiration of the extra $600 in weekly unemployment benefits will provide a new test for the economy and the stock market, which also faces the danger of a renewed surge of coronavirus infections this fall as well as the presidential election.
To many Americans, Wall Street’s rapid recovery — even as 28 million Americans remain jobless — is a sign of something profoundly amiss in the economic system. The gains from rising stock prices go disproportionately to the well-off: 84 percent of American households with an annual income of $100,000 or greater own stocks vs. 22 percent of those making $40,000 or less, according to a recent Gallup survey.