Why the stock market and the economy don't add up

The market's at all-time highs. So why's our economy still hurting?

Aug 24, 2020 | Editorial | Investing | Jobs | Business
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Is the recession really over?

According to the markets, the answer might be "yes." When the S&P 500 surged to an all-time high after losing more than 34% of its value earlier in the year, the US seemed to have completed its fastest recovery from a bear market ever. But in this new bull market, the economic picture is still grim: the unemployment rate is roughly 10%, and a wave of evictions loom for millions while stimulus negotiations seem stuck on "pause." How can the very ticker at the top of any news outlet's "business" page be so disconnected from our economic reality?

First: the stock market is not the economy

It's an oldie, but a goodie: the stock market is not equivalent to our economic performance at the moment. When news sites mention the "market," they tend to mean major indexes like the Dow and S&P, which are shaped by the behavior of millions of investors. This behavior is often based on news about the economy, but with so many variables at play, predicting exactly how the market will react is a puzzle no one can reliably solve.

The market is based on more than the present

Investors buy and sell based not only on what happened but also on what they believe may occur in the future. Throughout the S&P's 126-day rebound, investors have been optimistic about the world's ability to recover from the pandemic. Despite the setbacks in ongoing stimulus negotiations, they still expect trillions in government funding to flow into the economy soon. These warm and fuzzy feelings about our financial future, while subject to change, help explain why the market has grown despite broader economic struggles.

And the stock market doesn't represent all Americans

Historically, the stock market represented a minority of the country — just over 30% of Americans owned stock 30 years ago. But after multiple decades of growing stock market participation, we're in the midst of another decrease. While as many as 62% of Americans owned stock in 2002, either directly or through retirement and mutual funds, only 55% of Americans own stock of some kind today. While that decrease may seem relatively small, as many as 23 million more Americans could have benefited from 2020's stunning market turnaround had participation remained constant.

So who does the market best represent?

Disproportionately, the rich. The wealthiest 10% of Americans owned 87% of the stock market in Q1 of 2020. It's part of a steadily increasing trend: the top 10% owned 84% just 10 years ago. And even among the wealthy, that ownership is concentrated at the very top: 52% of all US stocks are owned by the top 1% richest Americans. So when the stock market surges, it's not a stretch to say the rich are getting richer.

Can Main Street and Wall Street intersect?

While the movements of the market can feel disconnected from our daily lives, it doesn't mean that the market's recent gains aren't available to the average person. In fact, they may be more accessible than ever. Trading apps utilizing commission-free trades and fractional shares have made it possible to put money in the market more quickly and easily, stimulating a recent surge in investing. And risky single stock purchases aren't the only investment growing in popularity; diversified, low-fee Exchange-Traded Funds (ETFs) are being bought at record rates. But whether new technology and increased accessibility will change the connection between the market and our economy is, much like the market itself, impossible to predict.


Albert

Albert

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