Stock market is not the economy
Howcan the stock market go up, while the economy is still struggling to recover amid the pandemic? The answer is that the stock market is not the economy, and vice versa.
Let’s start with the economy. As expected, the second quarter of 2020was the most debilitating for theU.S. economy since the government began keeping records in 1947— and about four timesworse than theweakest quarter of the Great Recession. The Bureau of Economic Analysis said real gross domestic product (GDP) decreased at an annual rate of 31.7% in the second quarter of 2020. The good news is the recovery has begun, and the third quarter should showa significant bounce.
Even with the improvement, it is likely to be a long slog. Nearly two-thirds of theNational Association for Business Economics (NABE) members who participated in the August 2020NABE Economic Policy Survey believe theU.S. economy continues to be in a recession that began last February, said
NABE President ConstanceHunter, CBE, chief economist, KPMG. Almost half the respondents expect inflation-adjusted gross domestic product to remain belowits fourthquarter 2019 level until the second half of 2022 or later. And 80% of panelists indicate there is at least a one-in-four chance of a “double-dip” recession.
The labor market showed similar results, bottoming in lateMarch/earlyApril, with about 22 million jobs lost and the unemployment rate soaring to nearly 15%. About half of those unemployed have foundwork, but that still leaves employment downby 11.6 million since the pandemic began— 25% more than we lost to the Great Recession, said Diane Swonk, chief economist atGrant Thornton. Of greater concern to her: “The pace of jobs recovery has slowed, while the ranks of the permanently unemployed have risen.” The Internal Revenue Service agrees with Swonk. In a recent forecast, it predicted that there will be about 229.4million employee-classified jobs in 2021 – more than 37 million fewer than it had estimated last year.
With poor economic results and dire predictions, why has the stock market soared since theMarch lows? The answer is investors are notworried about the past or even the near term; rather they are looking ahead to the future and betting on corporate “winners” ofCOVID-19 (think Facebook, Apple, Amazon, Tesla, Microsoft, Google, Netflix) and their ability to make a lot of money.
Additionally, with the Federal Reserve committed to keeping interest rates at zero for the foreseeable future, the notion of TINA is important. Whois Tina, you ask? TINA stands for “There isNo Alternative,” and it is applied to the investmentworld as follows: “With0% interest rates, I can’t keepmy money in the bank, bonds are paying bupkis, so there is no alternative, except stocks.”
The two concepts have driven stocks higher, but there’s another issue here: Not all Americans can find comfort in the ascent of equities.
Gallup finds 55% of Americans have exposure to the stock market, which is a share that has remained consistent over the past decade. That means that 45% do not. Of those who do own stocks, the Federal Reserve finds 51.8% of stocks and stock mutual funds are held by the top 1%, while the share of ownership by the bottom 50% is less than 1%.
Economists and analysts tell me that while the fortunes of the stock market can diverge for a period of time, they usually end up moving in the same direction. Which direction that is remains unknown at this time.