Do stock prices equate to eco­nomic health?

Milwaukee Journal Sentinel - - Death Notices - TOM SALER

It was dur­ing GM CEO Charles Er­win Wil­son’s con­fir­ma­tion hear­ing to be sec­re­tary of de­fense un­der Pres­i­dent Dwight Eisen­hower in 1953 that “En­gine Char­lie” is said to have ut­tered the fa­mously self-serv­ing line, “What’s good for GM is good for Amer­ica.”

In fact, what Wil­son told Congress was more nu­anced, and his ac­tual words have rel­e­vance to the dis­con­nect be­tween stock prices and the econ­omy.

When asked if he could make a de­ci­sion as de­fense sec­re­tary that would be ad­verse to GM, Wil­son said he could but added he didn’t think that would hap­pen be­cause, “for years, I thought that what was good for Gen­eral Mo­tors was good for Amer­ica, and vice versa.”

Of course, we’ll never know for sure if Wil­son changed his mind about the al­legedly sym­bi­otic re­la­tion­ship be­tween the cor­po­rate bot­tom line and the na­tional in­ter­est, but he at least hinted at the recog­ni­tion that Wall Street and Main Street were not the same place.

Prof­its, not in­comes

The stock mar­ket is to the econ­omy as the weather is to the sea­sons: strongly cor­re­lated, but of­ten with im­por­tant cat­e­gor­i­cal di­ver­gences.

Just as a po­lar vor­tex and bomb cy­clone can form amid the warm­est global cli­mate con­di­tions on record, in­comes can lag and eco­nomic growth dis­ap­point even as the stock mar­ket booms.

It was a year ago that Pres­i­dent Don­ald Trump left the busi­ness world for govern­ment work. Judg­ing from his re­cent com­ments, how­ever, Trump’s views about the re­la­tion­ship be­tween the stock mar­ket and the econ­omy ap­pear to hew close to Wil­son’s par­tial mis­quote, with the pres­i­dent even sug­gest­ing — er­ro­neously — that gains in eq­uity prices re­duce the na­tional debt.

On sev­eral oc­ca­sions, Trump tweeted about how the string of record highs in the stock mar­ket meant the Amer­i­can econ­omy was do­ing well. That’s at odds with the mes­sage he so force­fully de­liv­ered on the cam­paign trail in 2016, as stocks were putting the fin­ish­ing touches on a 235% rise dur­ing Pres­i­dent Barack Obama’s two terms.

Stock prices re­flect the re­ported and pro­jected prof­its of pub­licly traded U.S. com­pa­nies, as viewed by investors through the fil­ter of cur­rent and ex­pected in­ter­est rates. Those prices do not nec­es­sar­ily re­flect the earn­ings of or­di­nary Amer­i­cans, which de­pend on nu­mer­ous fac­tors not al­ways per­fectly cor­re­lated to the health of pub­lic cor­po­ra­tions.

In par­tic­u­lar, the con­nec­tion be­tween prof­its and in­comes is im­pre­cise, at best.

Since the cur­rent long-term bull mar­ket in eq­ui­ties be­gan in 1982, the nom­i­nal value of the U.S. stock mar­ket has climbed at a com­pound an­nual rate of 9.7%.

Over that same pe­riod, equiv­a­lent growth in the me­dian house­hold in­come was a pal­try 3.1%, less than one-third of the mar­ket’s rate.

Yet dur­ing the longterm bear mar­ket in stocks be­tween 1968 and 1982, the cap­i­tal­iza­tion of the U.S. stock mar­ket grew by 2.1% per year while the me­dian house­hold in­come in­creased by 6.3%, or triple that rate.

Small sam­ple

There are about 4,500 com­pa­nies traded on U.S. se­cu­ri­ties ex­changes. Most ap­pear to be do­ing well.

But those pub­licly traded com­pa­nies rep­re­sent only 0.00075% of the roughly six mil­lion Amer­i­can busi­nesses with em­ploy­ees, and just 0.0002% of the 22 mil­lion Amer­i­can busi­nesses with­out em­ploy­ees.

Less than one-fifth of the do­mes­tic work­force is em­ployed by the For­tune 500 be­he­moths that make up about twothirds the to­tal cap­i­tal­iza­tion of the U.S. eq­uity mar­ket.

In re­cent years, a vir­tu­ous circle has de­vel­oped be­tween stock prices and the econ­omy through the so-called wealth ef­fect.

To the ex­tent peo­ple feel con­fi­dent when stocks are ris­ing, they are more likely to sup­port eco­nomic growth by spend­ing some of those pa­per prof­its.

The risk, of course, is what hap­pens when fi­nan­cial as­set val­ues stop ris­ing, a co­nun­drum over which mon­e­tary pol­i­cy­mak­ers have long fret­ted, but re­main un­sure about how to re­solve.

In any case, the his­tor­i­cal record is clear: The stock mar­ket does not au­to­mat­i­cally re­flect the econ­omy or the fi­nan­cial well be­ing of most Amer­i­cans.

Tom Saler is an au­thor and free­lance jour­nal­ist in Madi­son. He can be reached at tom­

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