(The Hill) The expression “stock markets are not the economy” may have never been truer.
The S&P 500, an index that tracks the country's largest publicly traded companies, has all but erased its pandemic losses and closed within a fraction of a percentage point of its all-time high Thursday.
But far away from Wall Street, the economy on main streets in cities and towns across the country feel as if they are in tatters.
Unemployment stands at 10.2 percent as thousands of businesses remain closed. Many of the jobs shed when businesses closed their doors for extended lockdowns have not come back, and the jobless rate remains at its highest level since the Great Depression.
Gene Goldman, chief investment officer at Cetera, says that equity markets are enjoying a V-shaped recovery even as the real economy is experiencing a slower, U-shaped recovery.
“It does not make sense,” he said.
While some of the economic data that’s come out has been positive, Goldman noted that a lot of the real time indicators are showing worrisome signs.
Last month, for example, Yelp found that 26,000 restaurants had closed, almost 16,000 of them permanently.
“Think about the workers who lost their jobs, whose benefits have been cut and who are uncertain about paying their rent.” he said. “Those are the consumers, they’re the ones who are supposed to be buying things.”
Consumer confidence fell in 41 states over the course of July, according to Morning Consult, particularly in the South and West, and remains some 24 points below its pre-pandemic average.
So why are markets flying so high?
A central reason for the spike is the Federal Reserve.
The Fed dropped interest rates to near zero and opened a slew of new lending facilities to keep financial markets afloat. Its balance sheet exploded from roughly $4.3 trillion in mid-March to about $7 trillion today.
“I think what’s driving the market is the incredible response from the Federal Reserve to provide a tremendous amount of liquidity to ensure the smooth functioning of markets,” said Michael Arone, chief investment strategist for State Street Global Advisors.
“Markets are convinced that fiscal policy has helped soften the blow.”
Brad McMillan, chief investment officer for Commonwealth Financial Network, says some of the stock market returns are a bit of an illusion.
“You can make the case that a handful of companies are buoying the stock market as a whole, even when the rest of the stocks aren’t doing a whole lot better,” he said.
Just five companies — Amazon, Apple, Facebook, Netflix and Google parent Alphabet — make up about a quarter of the S&P 500’s value.
The fact that those tech giants have benefited extraordinarily from the pandemic hides weakness elsewhere. Even the other publicly traded companies, however, are in better shape than the small, private businesses that drive the economy.
“A public company is by definition going to be much better capitalized than a company on Main Street,” McMillan said.
Such firms have access to cheap capital, bond markets, fancy accountants that can find them tax benefits and more cash on hand than the mom and pop shop around the corner.
“Your average small business isn’t going to have access to any of these.”
With so many positive assumptions baked into the markets, analysts say there are a slew of threats to the stock market’s gains, and there could be a serious correction, even if markets don’t return to March-level lows.
“This market feels overdone, overvalued, stretched, speculative, pick your adjective,” said Mark Zandi, chief economist at Moody’s Analytics. “There will be a day of reckoning, but who knows when it will occur. The irony is that it might happen after the pandemic.”
One the main threats to the stock market is gridlock in Washington.
The federal government’s swift response to the pandemic sent trillions of dollars in support to Main Street through an eviction moratorium, stimulus checks, loans to businesses and a $600 weekly boost to unemployment benefits.
As Democrats and the White House clashed on a follow-up, most of those benefits and programs expired, leaving some 29 million people with vastly reduced unemployment benefits.
While President Trump has issued executive orders meant to extend the moratorium on certain evictions and a portion of the unemployment boost, the reductions in support have raised fears about what will happen to the economy.
“I think that’s a potential inflection point. The widespread consensus is that the lawmakers will get their act together in the next few weeks. If they don’t, the market’s got a problem,” said Zandi.
Oddly, one reason that lawmakers may feel alright delaying a deal while they negotiate the terms is the strong market itself.
“It’s really quite disconcerting. We’re in a hall of mirrors where policymakers are looking at the market and the market is looking at policymakers, and somebody’s gotta blink,” said Zandi.
That could also spell trouble for Trump, who sees bubbly stock markets as a sign that his economic prowess is putting the country back on track and a key selling point going into November’s election.
“Big Stock Market Numbers!” he tweeted on Tuesday, recalling headier economic times when he regularly praised the stock market’s performance.
Earlier in August, he warned that Democratic rival Joe Biden’s expensive plans would be ruinous for markets. “Markets and your 401k’s will CRASH. Jobs will disappear!”
Democrats have taken a different view, saying that Trump’s praise for the markets demonstrated a disconnect from the economic realities on the ground.
“Donald Trump has no understanding of the challenges American families are facing,” said Sen. Ron Wyden (Ore.), the top Democrat on the Senate Finance Committee.
“To him, the economy is doing well as long as the portfolios of his wealthy buddies go up in value. That’s why he can’t lead an economic recovery and his only idea is tax cuts for the very top,” he added.
House Financial Services Committee Chairwoman Maxine Waters (D-Calif.) said the administration needed to return to the negotiating table.
“The stock market has mostly recovered, but the fact remains that millions of people across this country are struggling to put food on the table and keep a roof over their head during this crisis,” she said.
Neil Sroka, a spokesman for the progressive political group Democracy for America, says that while good stock numbers typically help an incumbent, they are unlikely to do much for Trump this year.
“I think in the current situation, the performance of the stock market is going to be largely irrelevant. The dominant issue between now and November is going to be the coronavirus outbreak and the administration’s disastrous response to it,” he said.
Moreover, he argued, the disconnect between Wall Street earnings and Main Street pain could help bolster populist policies.
“What I think we’re seeing is that the difference between what goes on in equity markets and the lived experiences of Americans creates a political opportunity both on the left and the right,” he said.
“It’s probably a good thing for those of us who think we need systemic change,” he added.
