How is Wall Street so healthy while Main Street is teetering?
NEW YORK — The stock market is not the economy. Rarely has that adage been as clear as it is now.
An amazing, monthslong rally means the S&P 500 is roughly back to where it was before the coronavirus slammed the U.S, even though millions of workers are still getting unemployment benefits and businesses continue to shutter across the country.
The S&P 500, which is the benchmark index for stock funds at the heart of many 401(k) accounts, ended Thursday at 3,373.43 — near its closing record of 3,386.15 set Feb. 19. It’s erased nearly all of the 34% plunge from February into March in less time than it takes a baby to learn how to crawl.
Here’s a look at how Wall Street has flourished while Main Street struggles:
The big guns
The corner bars, the family restaurants, and other small businesses across the U.S. that are teetering or closing for good aren’t listed on the stock market. Apple, Microsoft, Amazon, Facebook and Google’s parent company are, and movements in their stocks alone are dictating the action in the S&P 500 more than ever before.
The pandemic has accelerated work-at-home and other trends that have boosted Big Tech, and their profits are piling up. The five big tech-oriented giants are worth a combined $7.6 trillion, and by themselves account for more than 22% of the S&P 500’s total value.
Because stocks with the biggest market values carry the most weight in the S&P 500, the movements of Big Tech matter much more than what airlines, cruiseship operators or other still-struggling companies are doing. American Airlines is down more than 50% for 2020 so far, but its much smaller market value means it doesn’t move the needle like Big Tech. It would take 280 American Airlines to have the heft of one Apple.
The stock market has seen some broadening out of gains recently, with stocks of smaller companies doing better. But Big Tech has done the heaviest lifting in the S&P 500’s rally.
Help from Washington
A famous saying on Wall Street is: Don’t fight the Fed. The central bank is doing everything it can to support the economy, from cutting interest rates to nearly zero to the unprecedented promise to buy even riskier corporate debt. It’s all aimed at ensuring lending markets have enough cash to run smoothly and to prevent prices from going haywire. Economists say the moves have helped avoid a 200809 style meltdown of the financial system.
The Fed has signaled that it will keep its benchmark short-term interest rate at nearly zero through at least 2022, and low rates are often like steroids for stocks. With Treasurys and other bonds paying relatively little in interest, some investors are turning instead to stocks, gold and other investments, boosting their prices.
Congress also approved an unprecedented amount of aid for the economy. Some portions of that aid have already expired, and another economic relief package is tied up in partisan rancor on Capitol Hill. But many investors seem to expect Washington to eventually come to a compromise and throw another lifeline to the economy.
Nature of the market
Investors are setting stock prices now based on where they see corporate profits heading in the future. And for many on Wall Street, the future looks brighter than the bleak present, in large part because of hopes that a vaccine for the new coronavirus could help things get back to normal.
“Main Street is the now, Wall Street is the future,” said Sam Stovall, chief investment strategist at CFRA Research.
Companies have begun final-stage testing of potential vaccines for COVID-19, and many investors are hopeful that something could be available either late in 2020 or within a year. A return to normal could help the economy get back on track and perhaps boost profits back to record levels.
Stock prices tend to track with corporate earnings over the long term.