Now is the perfect time to talk about why the stock market does not directly reflect the economy - Technical.ly Philly

Civic

Jan. 22, 2021 3:31 pm

Now is the perfect time to talk about why the stock market does not directly reflect the economy

If you're measuring American success by the Dow, consider which Americans you're talking about.
The trading floor of the New York Stock Exchange during the 2014 Zendesk IPO.

The trading floor of the New York Stock Exchange during the 2014 Zendesk IPO.

(Photo by Flickr user Scott Beale / Laughing Squid, used under a Creative Commons license)

If you’ve been watching trends in the U.S. economy over the last year, you might be having an experience similar to mine — feeling a bit of whiplash comparing unemployment and poverty numbers to the ebbs and flows of the overall strong stock market.

As a tech and business reporter, I often keep my eye on which companies will go public, and which industries are growing based on how they’re performing. These details can point to expansion and success for the region.

But it’s far from the whole story. It is the job of Technical.ly’s mid-Atlantic reporters to cover the tech and innovation economies in their respective cities every year, but 2020 was an entirely different ballgame.

Last year, we expanded our coverage to include many of the life-altering events that affected local economies — a widespread racial justice movement, a tumultuous election year, growing unemployment due to the coronavirus pandemic, and the pandemic itself. We’ve covered what economic relief looks like in the form of PPP and other federal loans, citywide efforts to sustain hurting industries and how the pandemic is reshaping the workforce, especially for women.

Advertisement

In recent weeks, as two COVID-19 vaccines began being distributed throughout the U.S., economic experts began to share what they believed the path to economic recovery looked like. The market’s also been on my mind as we report for What’s Next for the Economy Month? here at Technical.ly.

Two economic realities

I brought up these ideas recently with Rich Prisinzano, director of policy analysis at Penn Wharton Budget Model, a nonpartisan, research-based initiative that offers economic analysis of public policy’s fiscal impact. Prisinzano and I first connected back in November, when his team presented their analysis on then-President-elect Joe Biden’s proposed policies. We talked this week about what 2021 might hold, and while discussing predictions for economic recovery, he highlighted the two salient economic experiences most Americans are facing right now.

Millions of Americans are still unemployed, and to them, 2020’s stimulus bills were more like lifeboats. Meanwhile, many others — most likely those who are able to work from home and haven’t experienced a loss in wages — have banked or invested their $1,200 and $600 checks.

The checks were a fair attempt at aiding American families, but more targeted programs would be better, Prisinzano said. At this point, there are people who categorically do not need “relief,” he said, like young working people who are living with their parents and saving the stimulus checks for a rainy day.

Ideally, the federal government could prioritize people with children, people who have lost wages or jobs all together, or those directly effected by the pandemic in vulnerable industries to get more targeted relief. This recession is different than the crash in 2008, Prisinzano said, when federal relief was meant to motivate people to go out and participate in their local economy. Now, it’s helping people pay rent or buy groceries for a few months.

“It’s not quite stimulative — it’s actually sustaining,” he said.

So that’s a snapshot of the economy. Now, what’s up with the stock market?

Stock market fallacy

The same year that saw national unemployment rates as high as 15% and nearly one-third of all households behind on housing payments in July, the market reached record highs.

Throughout his presidency, Donald Trump often touted a flourishing stock market as proof that the U.S. economy was strong. The market reacted well to Biden’s inauguration Wednesday, Prisinzano said, but that doesn’t mean we’re suddenly in a good spot.

Stocks are owned by everybody,” Trump said while boasting of the market’s success in September. And while it’s true that more than half of all American families have some investment in the stock market via a retirement account, they’re making a few dollars when the market is up, not thousands or millions. Only about 14% of Americans are actually are directly invested in individual stocks, the Pew Research Center found in 2020.

Even if you’re directly invested, those who already have wealth are the ones making big gains. In the third quarter of 2020, the wealthiest 10% of American households owned 88.3% of all stocks and mutual funds, according to the Federal Reserve.

“The average person sees only capital gains when they sell their house, or perhaps small increases in an IRA, 401k or savings account,” Prisinzano said. “The average person is not the people seeing amazing growth with stock in GE, or Apple. There’s a saying that when the stock market goes up, rising tides lift all boats, but the percentage of income or wealth that represents is very different than your average American.”

I’ll continue to keep my eye on the Dow and watch for emerging companies from the Philly region to go public and further prove our reputation as a growing life sciences or data analytics hub. But until most Philadelphians get to return to and feel safe at work, then go out and spend money at local businesses — and even beyond then, too — I’ll ask you to repeat this phrase with me: The stock market does not equal the economy.

-30-
CONTRIBUTE TO THE
JOURNALISM FUND

Already a contributor? Sign in here
Connect with companies from the Technical.ly community
New call-to-action

Advertisement

Sign-up for daily news updates from Technical.ly Philadelphia