Wall Street, Main Street diverge

How is it possible that at the same time America is reeling from the worst economic downturn since the Great Depression, the stock market reaches its highest rally point in history?

The coronavirus plague has closed businesses, shuttered schools and upended all aspects of life. The U.S. economy suffered its worst period ever in the second quarter of 2020, with gross domestic product falling 32.9 percent. More than 30 national-brand retail bankruptcies, including storied outlets like Neiman Marcus and Brooks Brothers, have fallen victim. More than 30 million Americans have lost jobs since March. Another 1.1 million became unemployed just last week.

Despite these grim statistics, the stock market has risen to record heights. Stocks tanked in line with the rest of the economy in February. The index dropped 34 percent before hitting bottom on March 23. Since then, despite an economy that continues to deteriorate, the S&P has risen more than 50 percent. How is that possible?

The short answer is that the economy and the stock market are two different things. The economy is a snapshot of reality as measured by financial data derived from income and spending results. The stock market is a casino where traders place bets on a company’s future profit prospects. Investors are signaling optimism for the year ahead.

The stock market tracks only a fraction of the nation’s economic activity. The Standard & Poor is an index of the 500 largest publicly traded U.S. companies. S&P-listed companies employ about 20 percent of America’s 140 million workers. Small businesses, like insurance agencies and restaurants, employ almost 50 percent. Small businesses have been massacred by the pandemic, but their misfortunes are not a factor in the stock market equation.

Within the S&P 500 itself, corporate business activity is also skewed. The information technology sector — containing Facebook, Apple, Microsoft, Google, Netflix, and Amazon — accounts for more than a quarter of its total market capitalization. These six companies are booming as Americans spend quarantine time shopping online or foraging on social media and streaming entertainment.

Technology stocks have risen 43 percent. All the other stocks in the S&P 500 fell a combined 4 percent. Apple’s $2 trillion market value has doubled since March. Amazon is up 70 percent. The technology sector’s influence on surging stock value came despite overall corporate earnings plummeting 33.8 percent from S&P 500 companies for the quarter ending July 31.

How can a stock index post record earnings decline and a record rally in the same quarter?

Look no further than the federal government, which intervened with multi-trillion-dollar corporate bailout efforts. The CARES Act of stimulus relief spending became law March

27. The date coincides with the stock market rebound. The relief had a huge impact, calming investor fear.

The Federal Reserve Bank provided $2.3 trillion in loans to assure businesses had credit access. The Fed created a $700 billion bond purchase program targeting 800 companies, sheltering shareholders from revenue declines and bankruptcy risks.

The CARES Act directed $2.1 trillion to individuals and small businesses. The relief provided one-time household stimulus payments, expanded unemployment benefits, and a small-business forgivable loan program. These programs expired July

31.

Without the disproportionate impact of the tech stocks and massive federal bailout, Wall Street would be mired in the same malaise punishing the real economy.

Those of us mired in the real economy may find solace knowing that investors who live in the Wall Street world are bullish.

Investor hopes are high for a

COVID vaccine next year. The bet is that a successful vaccine inoculation will ease social distancing, renew consumer spending and spark economic recovery.

It is a rosy outlook. If the virus lingers, shutdowns will persist. If shutdowns persist, the recession will worsen. If the recession worsens, quarterly earnings will tumble. If quarterly earnings tumble, Wall Street optimism will morph into panic.

There is no quick turnaround for what ails America. The federal government must again step up for the welfare of its citizens and to maintain some semblance of normal life. Congress must act urgently on another round of stimulus relief.

The real world — where millions of Americans and small businesses are barely hanging on — needs that relief. It is a humanitarian imperative and a balm for the wounded economy. Today’s stock market also will need further federal stimulus intervention to maintain those lofty valuations.