Are stock prices the ultimate measure of policy success?

After all these years, Hertz is No. 1 again. Not in market share: The car-rental company is a distant second to Enterprise. But Hertz has become Exhibit No. 1 of the madness that’s been sweeping the stock market in these times of COVID-19 — a madness that may do considerable harm, not because stock prices themselves matter all that much, but because Donald Trump and his minions treat the stock market as a measure of their success.

Last month Hertz, which has seen its business plunge amid COVID-19, filed for Chapter 11 bankruptcy protection. Hertz’s stock price fell from over $20 in February to less than $1 in early June. But then investors suddenly piled into the stock, driving it up by more than 500%.

The Hertz story was just one example of a broader phenomenon. The run-up in stock prices that took place between mid-May and Thursday’s sudden plummet was driven, to an important extent, by investors rushing into very dubious companies.

Stock markets never bear much relationship to the real economy, but these days they don’t seem to have much to do with reality overall.

Think of what’s going on in the stock market as a play in three acts (so far).

The first act was the huge decline that markets experienced as the threat from COVID-19 became clear. This decline reflected justified concerns about future profits, but it also reflected a developing financial crisis: For a while credit markets were seizing up much the same way they did in 2008.

The Federal Reserve, however, moved quickly, buying bonds, establishing special lending facilities, and essentially doing whatever it took to lubricate markets and keep money flowing freely.

The result was the second act of the play, a stock rebound that made up about half of the losses from the initial plunge.

Up to that point, stock prices generally made sense. But then came the third act, a surge in prices that eliminated most of the previous losses and drove the Nasdaq to a new high. This bore all the usual signs of a bubble.

Robert Shiller, the world’s leading expert on such things, has noted that asset bubbles are, basically, naturally occurring Ponzi schemes. Early investors see big gains because later investors drive prices up, inducing more and more people to buy in until something cuts off the flow of new money, and suddenly everything crashes.

So it was with the recent stock surge. Encouraged by the Fed-induced recovery of stocks from their March lows, some investors began buying. Their optimism became a self-fulfilling prophecy, as initial gains led more cautious investors to join in, driven by FOMO — fear of missing out.

Most of the evidence suggests that this apparent bubble may have been caused in part by small investors, “retail bros,” people who normally bet on sports who were seeking an alternative. And as Hertz shows, quality doesn’t matter much.

And now the bubble may — may — be bursting. But does it matter?

Stock prices have some impact on business investment and consumer spending, but these effects are probably small.

But the Trump team sees stock prices as the ultimate measure of policy success.

Trumpists took the rising market as validation for everything they were doing — their push for early reopening even though COVID-19 wasn’t yet contained, their opposition to further relief for unemployed workers. In other words, the irrational exuberance of the retail bros may have enabled the irresponsibility of an administration that didn’t want to deal with reality anyway.

And while falling stocks may provoke a reconsideration, a lot of damage has already been done.