For many Americans, the pandemic-induced financial crisis has brought an onslaught of economic pain not seen since the Great Depression.
The U.S. economy, as measured by real GDP, contracted at a record-shattering 32.9% pace last quarter. Roughly 1 in 10 workers can’t find a job, and approximately 1 in 5 Americans who rent their homes are at risk of eviction by the end of September.
Yet earlier this week, President Donald Trump told reporters, “We have the strongest economy — performing economy — in the world.”
“We’re up, I think, it’s $9 trillion since March — $9 trillion dollars in value,” Trump said at an Aug. 12 press briefing, calling the stock market “incredible.”
While the rest of the economy has withered, the Dow Jones Industrial Average and S&P 500 each have soared more than 50% since bottoming out on March 23.
Trump repeatedly has pointed to rising equity markets to validate his administration’s handling of the economy, but many experts say that’s misleading — and that not enough Americans truly are benefitting.
“There is a lot of useful information in the stock market, but we need to interpret it with caution,” Itay Goldstein, a professor of finance and economics at the University of Pennsylvania’s Wharton School of Business, told ABC News. “We can’t look at it and say the stock market is up, everything is good.”
“The stock market is not the economy,” he added. “The stock market is a very selective group of firms that are traded in the market, and those groups of firms are mostly large firms.”
The Dow Jones Industrial Average, which contains only 30 companies, and the S&P 500 are “by selection the bigger firms, so a lot of small businesses are just not there.”
“Basically, what you see in the stock market,” Goldstein continued, “is a selection of firms that are not hurt as much by the current crisis, in particular when you think about firms like Amazon and Microsoft and Google and Apple and Netflix, all these big tech firms, some of them are not hurt and some of them even benefit from the current economic situation.”
“And then you go on Main Street and you see all these Mom and Pop shops and these small restaurants, and they are hurting,” he added. “But they are not reflected in the stock market.”
‘There’s not always a lot of correlation’
Not only are many of the listed firms not representative of American businesses, investors who can afford to buy pieces of the nation’s largest firms aren’t really representative of most Americans, Goldstein added.
In just one example, Amazon stock hit a record high after the market plummeted in March, and CEO Jeff Bezos saw his net worth increase by more than $80 billion, according to Bloomberg’s Billionaires Index. Experts have pointed to the stock market as one of the reasons for America’s widening wealth gap, a gulf stretching further amid the pandemic.
“The people who benefit from it the most are people of upper class,” Goldstein said. “Generally, people who are poor and not earning as much, they don’t have the exposure to the stock market. There are all sorts of studies over the years on inequality and the stock market, but, in general, the poorer you are, the less likely you are to be exposed to these gains in the stock market.”
Stock gains are “not a very credible sign of economic recovery,” he continued, and although markets do contain some useful indicators “it would be a mistake to just look at the stock market, see that the stock market is high, get all excited and think that there is no problem.”
Liz Ann Sonders, chief investment strategist at Charles Schwab, said markets tend to be forward looking — investors currently may have high hopes of a larger recovery or a vaccine.
Historically, Sonders told ABC News, markets peak before economies peak, and markets crash before economies crash.
“When you look at the longterm historical relationship between the stock market and the economy, the stock market is a leading indicator — it tends to move in both directions in anticipation of the turn in the economy,” she said.
“The two obviously reflect one another over the long term, but just because the stock market is either going up or down is not at the same time an automatic reflection of what the economy is doing,” she added. “There’s not always a lot of correlation between the two at a given moment in time.”
‘All this liquidity has to go somewhere’
A key reason markets have climbed, Goldstein and Sonders agreed, is because the Federal Reserve took dramatic steps to maintain liquidity.
Since the March market crash, the Fed has pulled out all the stops to help buoy the financial system — slashing interests rates further, unveiling a quantitative easing plan, buying corporate bonds.
“We’ve never seen liquidity pumped into a crisis to that degree, ever in history,” Sonders said.
“Because the economy during the worst of the pandemic was basically shut down, all this liquidity basically boosted the money supply, but it couldn’t find its way into the real economy,” she added. “But all this liquidity has to go somewhere, and it went not just into the stock market, but every market has done well — junk bonds, precious metals.”
Goldstein added that the Fed’s quantitative easing policies, which were also rolled out after the 2008 financial crisis, helps push up the price of treasuries, “which by market forces helps keep up other market prices.”
While the Fed isn’t buying equities, Goldstein said, it’s “buying treasuries and corporate bonds, and they are lending money to firms in all sorts of ways. That’s a big reason why prices are up despite the pain in the economy.”
Amid the pandemic, Amazon made headlines for securing some of the lowest borrowing costs ever secured in the U.S. corporate bond market, the Financial Times reported in June.
Sonders also noted out how major market moves “tend to be about psychology.”
She cited a quotation from Sir John Templeton, a legendary investor: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
“Notice there is not a single word in that quote that has anything to do with the economy,” Sonders said. “It is all psychological terms because that is the reality of the stock market.”