October 16, 2021

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Why the stock market went up during the Covid-19 pandemic and high unemployment

13 min read

You would never know how terrible the past year has been for many Americans by looking at Wall Street, which has been going gangbusters since the early days of the pandemic.

“On the streets, there are chants of ‘Stop killing Black people!’ and ‘No justice, no peace!’ Meanwhile, behind a computer, one of the millions of new day traders buys a stock because the chart is quickly moving higher,” wrote Chris Brown, the founder and managing member of the Ohio-based hedge fund Aristides Capital in a letter to investors in June 2020. “The cognitive dissonance is overwhelming at times.”

The market was temporarily shaken in March 2020, as stocks plunged for about a month at the outset of the Covid-19 outbreak, but then something strange happened. Even as hundreds of thousands of lives were lost, millions of people were laid off and businesses shuttered, protests against police violence erupted across the nation in the wake of George Floyd’s murder, and the outgoing president refused to accept the outcome of the 2020 election — supposedly the market’s nightmare scenario — for weeks, the stock market soared. After the jobs report from April 2021 revealed a much shakier labor recovery might be on the horizon, major indexes hit new highs.

The disconnect between Wall Street and Main Street, between corporate CEOs and the working class, has perhaps never felt so stark. How can it be that food banks are overwhelmed while the Dow Jones Industrial Average hits an all-time high? For a year that’s been so bad, it’s been hard not to wonder how the stock market could be so good.

To the extent that there can ever be an explanation for what’s going on with the stock market, there are some straightforward financial answers here. The Federal Reserve took extraordinary measures to support financial markets and reassure investors it wouldn’t let major corporations fall apart. Congress did its part as well, pumping trillions of dollars into the economy across multiple relief bills. Turns out giving people money is good for markets, too. Tech stocks, which make up a significant portion of the S&P 500, soared. And with bond yields so low, investors didn’t really have a more lucrative place to put their money.

To put it plainly, the stock market is not representative of the whole economy, much less American society. And what it is representative of did fine.

“No matter how many times we keep on saying the stock market is not the economy, people won’t believe it, but it isn’t,” said Paul Krugman, a Nobel Prize-winning economist and New York Times columnist. “The stock market is about one piece of the economy — corporate profits — and it’s not even about the current or near-future level of corporate profits, it’s about corporate profits over a somewhat longish horizon.”

Empty stores dot Main Street in Eastport, New York, on November 20, 2020.
Steve Pfost/Newsday RM via Getty Images

Still, those explanations, to many people, don’t feel fair. Investors seem to have remained inconceivably optimistic throughout real turmoil and uncertainty. If the answer to why the stock market was fine is basically that’s how the system works, the follow-up question is: Should it?

“Talking about the prosperous nature of the stock market in the face of people still dying from Covid-19, still trying to get health care, struggling to get food, stay employed, it’s an affront to people’s actual lived experience,” said Solana Rice, the co-founder and co-executive director of Liberation in a Generation, which pushes for economic policies that reduce racial disparities. “The stock market is not representative of the makeup of this country.”

Inequality is not a new theme in the American economy. But the pandemic exposed and reinforced the way the wealthy and powerful experience what’s happening so much differently than those with less power and fewer means — and force the question of how the prosperity of those at the top could be better shared with those at the bottom. There are certainly ideas out there, though Wall Street might not like them.

How the stock market boomed when American life soured

Many on Wall Street, like many people in America, were in denial about the realities of Covid-19 when it first began to take hold internationally in early 2020. In an interview with Vox last April, CNBC host Jim Cramer recalled wondering whether “another shoe will drop on this coronavirus outbreak” in early February, only to see stocks keep rising steadily. “But nothing happened. The market kept quiet,” Cramer told Vox. Indeed, stocks continued to reach record highs.

While stocks often rise slowly, they also fall fast. And once Wall Street caught on to the realities Covid-19 might bring, the market tumbled, wiping off some 30 percent of its value from mid-February to mid-March. “No one had any idea of what the future was going to be, how deep this is, how long it would be, how wide it would be,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

The S&P 500 bottomed out on March 23, just a week into New York’s shutdown, and after that, it made a remarkably strong recovery, month after month.

Most analysts and experts point to the Fed as the most important factor in supporting market confidence. The central bank announced a series of big measures to help support the economy and markets in March 2020, including saying that it would buy both investment-grade and high-yield corporate bonds (basically, debt that is risky and debt that is not).

“Not dissimilar to the global financial crisis, the Fed stepped in, and that was really a catalyst for a stock market recovery,” said Kristina Hooper, chief global market strategist at Invesco. “The Fed can be very, very powerful, almost omnipotent, when it comes to the stock market.”

Throughout the crisis, the Fed and Chair Jay Powell have made clear they will support markets and use every tool in their toolkit to do it. Powell has taken an extremely dovish tone and repeatedly said the Fed won’t raise interest rates — which would presumably slow down the economy and markets — preemptively. Basically, the markets let the Fed take the wheel. Even if it didn’t buy bonds itself, the knowledge that it would if necessary reinforced the markets — private investors swept in to take up corporate bond offerings from companies such as Boeing and Nike. Continued confidence in a dovish Fed has only reinforced market bullishness; while a bad jobs report may be bad for businesses and workers, to investors, it’s also more reassurance that low interest rates aren’t going anywhere.

The issue is, the Fed is a much more powerful force on Wall Street than it is Main Street. Its programs to help small and midsize businesses and states and cities have been far less effective than those set up to help corporations and asset prices.

The Federal Reserve’s programs have helped large corporations more than small to midsize businesses.
Stefani Reynolds/Bloomberg via Getty Images

Treasury Secretary Janet Yellen meets with President Biden for a weekly economic briefing in the Oval Office.
Amr Alfiky/The New York Times/Bloomberg via Getty Images

“It now feels like policy, be it the Fed or something else, that the stock market should really never go down,” said Dan Egan, vice president of behavioral finance and investing at Betterment.

To be sure, the Fed’s role is monetary policy, and it would have been bad if markets were allowed to crash or a litany of major corporations went bankrupt. And luckily for many struggling people and businesses, Congress stepped in with fiscal policy that could be more effective in helping the broader economy — a move that, no doubt, also helped markets. It’s good for corporations that people have money to spend.

Still, some wonder whether the Fed couldn’t have tried to go further to make sure its programs to support corporations flow to people other than shareholders. “Obviously it was good, the Fed needed to do something,” said Alexis Goldstein, senior policy analyst at Americans for Financial Reform. “But the criticism I would weigh was that there were no real conditions that workers were protected or rehired, that all the gains just didn’t go to the top.”

Goldstein pointed to a September report from the House of Representatives’ Select Subcommittee on the Coronavirus Crisis that found the Fed bought corporate bonds from at least 95 companies that issued dividends to shareholders while also laying off workers. “Surely the Fed is also so powerful that it can say, look, we need you all to prioritize rehiring your workers or we’re not necessarily going to rescue you, we’re going to rescue other companies, and that should be impactful,” Goldstein said.

Companies have been ruled by the mantra of shareholder primacy, where maximizing profits for investors is the end-all, be-all, for decades. Worker pay has severely lagged gains in productivity. Those trends were unlikely to change during a pandemic.

“Shareholder primacy means the job of corporations is to increase their share prices for this very small elite, and that means downward pressure on costs, including workers, where possible,” said Lenore Palladino, an assistant professor of economics and public policy at the University of Massachusetts Amherst. “The fact that the stock market is booming is because of the financialization of our goods- and services-producing companies, not because the real economy is doing so well.”

The market felt better about the pandemic than you probably did

Jack Ablin, the founding partner of Cresset Capital, recalls calling clients in the spring of 2020 and telling them they didn’t know how long the lockdowns and virus would last, but they were “confident” that within a year, it would be done. “Of course, it wasn’t,” he told Vox. But the general attitude remains: The markets figured things would get better, sooner or later. “Part of it was saying, look, this is temporary, we will eventually get back to business. So we were trying to look past the valley to the other side of normality.”

Not everything had to break in Wall Street’s favor for the market rally to continue — as mentioned, between the Fed and the future promise of corporate profits, investors had plenty of reasons to be confident — but it doesn’t hurt that it kind of did. The vaccine, which at the outset of the pandemic some experts warned might be years away, appeared by the end of 2020. Donald Trump did not want to accept the results of the 2020 presidential election, which some investors feared would spark chaos before voting day, but by and large, the US saw a peaceful transfer of power (with the exception of a riot at the Capitol, that, while disturbing, didn’t have anything to do with the Dow).

Investors also seemed confident that Congress would come through with more fiscal support for the economy. This, too, was not a given. The $900 billion package passed in the lame-duck session in December for months seemed highly unlikely. Had Democrats not taken both US Senate seats in Georgia, the $1.9 trillion American Rescue Plan, signed into law in March, would not have happened. While neither provided direct support to the markets, they did support the broader economy that the markets have for months been bullish on. Putting money in people’s pockets means they’ll spend it. It’s good for Wall Street that Main Street America doesn’t fail.

Some people in the industry point to a certain level of faith in America, like the type legendary investor Warren Buffett channeled during the financial crisis and Great Recession when he told people to “buy American.”

“You have to have an existential faith in America in order to be in stocks over the long term,” said Nick Colas, the co-founder of DataTrek Research.

“What has happened in the last 14 months or so is we’re believing in America again, we’re believing in our companies,” said Brian Belski, chief investment strategist at BMO Capital Markets. “From every bear market and every depression, we transition from despair to hope, and the hope was defined by American companies.”

It does look like the US is poised to emerge from the pandemic much before the rest of the world and spend its way to an economic recovery that many other countries could not. Now, it’s the investors who sold out of the market when it was falling last year who have been left out.

“There are two lessons to be learned over the past year. The first is that economic headlines are lagging and not leading indicators of the market; and second, market timing is a losers’ game,” said Saira Malik, chief investment officer of global equities at Nuveen, an asset manager.

Nuveen is currently interested in emerging markets for potential investment possibilities on the horizon — including countries such as Brazil, which continues to be ravaged by the pandemic. “We do feel like in the near term they are going to struggle. But the vaccines are becoming more and more available, and while they’re lagging a bit behind, we do think they’ll catch up, and they’ve tended to have the cheaper valuations to go with that,” Malik said.

At this point, it’s hard to wonder what, if anything, will truly unnerve investors.

There are still plenty of risks to the market, including that in the US, President Joe Biden and Democrats may take steps to raise taxes that would mean a hit for the bottom lines of corporations and investors. When chatter of the president’s capital gains tax proposal kicked up in late April, the markets took a small dip, but it was hardly catastrophic.

“We have an administration that clearly has ambitions and wants to pay for them by taxing capital, taxing corporate profits, now taxing capital gains. The resilience of the market in the face of all that is kind of interesting,” Krugman said. “There may be a little bit of determined resilience; there may be some element of when people are determined to be optimistic, facts don’t matter.”

Hooper, from Invesco, offered up the explanation of the Fed. “I do think on a short-term basis, we could see a sell-off if there is a risk that appears imminent, but we have to recognize that all current risks are being cushioned by this incredibly accommodative Fed, which does have an impact. It’s a powerful upward force on stocks that can counteract the downward forces.”

What the stock market does and doesn’t represent

How the stock market does matters to a lot of people. A little over half of all Americans report owning stocks, including in their retirement or pension plans. And during the pandemic, plenty of people got into day trading, for better and for worse. But some groups have much higher stakes in the market than others. More than 80 percent of stocks are owned by the wealthiest 10 percent of Americans, meaning when markets go up, they’re the ones who reap the most gains. White people are also the overwhelming majority of market beneficiaries — by Palladino’s estimates, 92 percent of corporate equity and mutual fund value is owned by white households, compared to less than 2 percent each by Black and Hispanic households.

“People often forget how concentrated corporate equity holdings are,” Palladino said. “They’re held mainly by wealthy white households.” Those are the people who disproportionately reaped the benefits of the stock market’s pandemic run, while people of color disproportionately suffered the health and economic consequences of the disease.

If the US wants to create a fairer, less extractive economy where corporations and shareholders aren’t living a very different reality than people trying to pay their rent or find a job, there are ways to do it. The federal government could raise corporate taxes and tax income from investments in the same way it does income from labor and seek to rein in CEO pay.

Demonstrators marched in New York City calling on Gov. Andrew Cuomo to pass a tax on billionaires and to fund workers excluded from unemployment and federal aid programs on July 17, 2020.
Spencer Platt/Getty Images

It could also clamp down on shareholder primacy and make sure companies base their decisions not only on making their investors rich but also on the well-being of their workers, customers, communities, and suppliers. In 2019, the Business Roundtable, a major business lobbying group, issued a statement that it would redefine the “purpose of a corporation” as one that fosters “an economy that serves all Americans.” The government and the public could find ways to hold them to it. Palladino, in her work, has outlined a number of proposals that would curb shareholder primacy, including requiring corporate boards to have worker representatives, banning stock buybacks, and boosting unions.

Beyond policy fixes, there’s also just the reality that the market measures very one specific thing — how investors think (rightly or wrongly) corporate profits are going to be in the future. And for many people, that measure is meaningless. “If you can assess that the economy is good when we’re in one of the worst economic moments of American history, then it’s a useless measure,” said Maurice BP-Weeks, co-executive director of the Action Center on Race and the Economy.

The past year has been a truly wild ride in America and for the stock market, though in different directions. Investors are reaching almost exuberant levels, from the GameStop saga to the crypto craze. Stocks are continuing their bull run, with no clear end in sight. There are plenty of warnings that investors are out over their skis, but then again, there always are.

It’s a far cry from a little over a year ago, when billionaire hedge funder Bill Ackman went on TV to warn that “hell is coming” because of Covid-19. Or maybe it did — just not for Wall Street.

Rani Molla contributed data reporting to this story.

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