On the same day American unemployment rose to levels not seen since the Great Depression, the stock market experienced modest gains. In fact, the NASDAQ closed with a high for 2020.
Some offered that Wall Street had already factored the bad economic news. But is it that simple? Could it be the relationship between the stock market and the overall health of the economy is at best tangential — cousins two or three times removed?
From financial writers to the nightly news, the stock market is portrayed as the most persuasive barometer determining America’s overall economic health. Presidents of both parties fortify this notion by running on the strength of the stock market. A portion of the president’s job performance is based on the health of the economy that is measured in part by the stock market. But it is difficult to reconcile the Standard & Poor’s index being roughly 16% away from its all-time high when 26 million jobs have been lost because of the pandemic.
Because stocks are held by a relative few (the bottom 90% own 16% of the stock), viewing the stock market as a leading economic indicator is to be disproportionately influenced by a small segment. It is to mistake a slice for the entire economic pie.
With few exceptions, the notion of being laid off is not positive economic news. But under the right conditions, investors could view layoffs as the shot in the arm the company needed, creating a rise in stock value.
This long-held fallacy was made evident by last week’s economic news and Wall Street’s response to it. Contrary to the prevailing belief, the stock market is a measure of the future corporate profits that people have invested. The price of, say, Amazon doesn’t rise because people have more jobs; its rises because of the belief that after-tax profits will be appealing.
Here’s how New York Stock Exchange President Stacey Cunningham defines it: “When we say the market, it’s not reflection of the strength of the economy; it’s a reflection of the public sentiment of the stocks that were in that index investors that we’re looking at.”
That’s not to offer there haven’t been occasions when the overall health of the economy and Wall Street ran on parallel tracks. During the 1960s, there were rising wages and low unemployment that coincided with a healthy stock market. To a lesser extent, one might also offer the 1990s.
But the 1990s were marred by a trend that began in late 1970s where productivity greatly outpaced the wages of the average worker.
In this context, it is difficult to not hear Vermont senator and former presidential candidate Bernie Sanders decrying America’s “rigged” economy. In addition to the appearance to corporations being immune to the pain that most Americans are feeling, there is a paradoxical reality for true believers in the “market.”
A laissez faire economic approach would have crippled the airline industry; the same would hold true for many hotel and restaurant chains. That’s obviously not what happened, nor should it, in my opinion. Government stepped in with the people’s money and bailed out many corporations in arguably the most painless manner possible. Few would argue against bailing out the airline industry, but is it reasonable to do so while allowing CEOs to still receive tens of millions in bonuses?
This was a bailout favorable to shareholders and top executives. Is there not something “rigged” about that? It is not exactly the way disciples of the market drew it up! How can it be good for America when it appears the investor class is succeeding while the labor class struggles? Is this merely a 21st century version of “God’s intent,” popularized by the Gilded Age?
Meanwhile, legal immigrants, some on the verge of becoming legal citizens, are afraid to apply for unemployment insurance for fear of deportation. Those who may not understand such fears enjoy the privilege of not being the object of immigrant ire. Unemployment insurance has been maliciously transformed into a free government handout, especially if the recipient was not born in America. This macabre display of ignorance reflects America at its worst. It accepts the use of taxpayer funds to bailout corporations in the most pain-free manner possible. But bemoan those who apply for benefits the individual has already paid into the system for unfortunate times such as this.
The underreported story remains the independent fundamentals driving the investor and labor classes, respectively. For the former, it is risk appetite and discounts rates fueling optimism. For the latter, it is the nebulous unknown fueling uncertainty.