Today the stock market is not so much a place where shares can be traded between buyers and sellers, but a mirror reflecting public perceptions of the president, the economy, the war on Covid-19, and an alternative to sports betting.
The president likes to tell the public that the stock market is a referendum on the success of his Administration. Echoing O.J. Simpson’s lawyer Johnny Cochran, “If the market’s up, you must reelect.” Former presidents recognize the folly of tying their electoral fortunes to something as fickle as the stock market. The Fed, raising or lowering interest rates, has a much larger role in the fortunes of the market than any president can hope for.
Case in point, as the Fed began raising rates throughout the first 3 quarters of 2018, the market took a 20% tumble in the last quarter of the year. As the Fed began reversing its rate increases in 2019, the market zoomed. It’s as simple as that. Markets love lower interest rates.
The stock market is a poor proxy for the economy, unless of course you own a lot of stock. According to this week’s Barron’s Magazine, “Real wages for lower-income families have barely budged over the past 20 years, while higher-income families have seen much higher increases…The top 10% of households own the majority of business equity, stocks, and investment real estate. When it comes to stock ownership, the top 10% owns 84% of the market.
Measures such as real (inflation adjusted) income growth, home ownership, and capacity to save are much more telling indicators of how well the average American is doing. Again quoting Barron’s, “While the top 10% of families by income saw average savings rates increase for the past three decades, the bottom 90% of families by income saw negative savings rates, contributing to higher debt levels.”
The economic discontent we are witnessing today has been building for decades. The trend is unsustainable and will eventually impact corporate earnings and stock prices. It’s no longer a question of if, but when.