It’s understandable that the president wants to use the markets as a measure of the economy’s health, even as unemployment hovers at 8.4 percent and many businesses remain crippled. Since the start of the year, the S&P 500 — even following the recent drop — is up 2.5 percent, and the Dow is down a mere 4 percent. If stocks were the sole measure of economic health, you might think the economy was on the mend, perhaps even poised for a breakout.
The president and his supporters are ignoring what former Federal Reserve chair Janet Yellen forcefully explained recently: “The stock market isn’t the economy. The economy is production and jobs, and there are shortfalls in virtually every sector.” How have stocks remained so resilient in the face of such a severe shock? In part, it’s because of inequality. Stocks are overwhelmingly owned by the top 1 percent, which means speculation has been able to continue even as more people have lost their jobs than at any time since the Great Depression.
What’s more, measures such as the Dow and the S&P 500 reflect only the very largest U.S. companies, which can weather steep slumps in demand in a way that Main Street enterprises can’t — while the relief packages Congress passed this spring were better at shielding large companies from economic harm than smaller ones. Given how troubling the underlying economic data are, the immunity of the markets can’t continue (as this past week’s decline may suggest).
When we compare the stock market with jobs data, the numbers are sobering. Spring’s temporary job losses — caused at first by the shutdowns — are settling into a long-term pattern of economic malaise that could reduce low-income and middle-class families’ earnings for years to come. Although the unemployment rate has dropped from its height of 14.7 percent in April, the Sept. 4 jobs report from the Labor Department’s Bureau of Labor Statistics indicates that losses once thought to be temporary are becoming permanent.
If the stock market doesn’t reflect the health of our economy, what does it measure? Most directly, it indicates the financial health of the richest among us. Overall, about 55 percent of Americans own stocks, according to Gallup, but ownership is heavily skewed toward the wealthy. According to Federal Reserve data, the top 1 percent of U.S. households own 39 percent of equities and mutual fund shares, and the top 10 percent own 83 percent — which leaves workers in the bottom 90 percent owning just 17 percent.
The wealthy are heavily invested in big companies. And it’s not just that indexes such as the S&P 500 — representing 500 of the largest — skew big. It’s also that a subset of truly giant corporations is driving market gains. The S&P 500’s increases have been led by five companies: Apple, Amazon, Microsoft, Facebook and Google’s parent, Alphabet. (Jeff Bezos, chief executive of Amazon, owns The Washington Post.) These five represent more than one-fifth of the roughly $29 trillion in total market capitalization of the S&P 500. In contrast, the Russell 2000, which tracks “small-cap” U.S. firms — those with an average value of about $2 billion — is down more than 10 percent since January.
But even big companies need customers. When overall demand sinks, why wouldn’t that be reflected in share prices? In part, the answer is that fiscal policies enacted by Congress and monetary policies put in place by the Federal Reserve this spring have disproportionately benefited corporations.
The Federal Reserve announced in March that it would pump several trillion dollars into the financial markets by continuing its “quantitative easing” — purchasing assets directly in the financial markets to support asset prices, while also buying about $1 trillion worth of bonds from big companies either directly or indirectly in secondary markets. As a temporary solution, it’s working. Trillions of dollars spread around by the Fed now support not just stock prices and corporate bonds but even junk bonds, real estate investment trusts and private-equity firms that continue to borrow at rock-bottom rates, taking advantage of the downturn and sustaining their debt-laden portfolio companies. These financial-market stimulus efforts continued apace even as enhanced federal unemployment benefits expired at the end of July.
Near-boundless support for U.S. financial markets, however, won’t save the real economy from a continuing recession. While it’s true that propping up asset values can stave off a financial crisis (for a while), it can’t deliver the broad economic stimulus needed to bring unemployment figures down — let alone protect Main Street’s businesses and workers.
Jerome Powell, chair of the Fed, has repeatedly said that his institution can’t keep equity and debt assets stabilized if the economy continues to deteriorate. Businesses are still going bankrupt. Low- and moderate-income renters who are unemployed are preparing to fight evictions in the coming months as moratoriums end. And workers in industries hardest hit by the pandemic — think airlines and big hotel chains, among others — who initially kept their jobs are now joining the ranks of the unemployed. Despite this grim reality, the Senate on Thursday rejected a stimulus bill — including unemployment assistance — that was far more modest than the one that expired in July. Amid all this, one thing remains clear: For Wall Street, too, there will be a reckoning.
This article has been updated.
CORRECTION: This article originally incorrectly referred to the Labor Department’s Bureau of Labor Statistics as the “Labor Department’s Bureau of Economic Statistics.”