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The Stock Market Is Not The Economy

2020 ended the year with stock prices at all time highs. Much of this has to do with the unprecedented support that the Federal Reserve and our politicians provided in response to the COVID pandemic.

They are hoping that by propping up the stock and bond markets that they are first preventing a depression and second that the higher stock prices will spill over into the real economy.

Unfortunately, our economy is not plumbed in a way to do that. Higher stock prices are the very antithesis of a solid, well-balanced economy. All it means is that all the monetary and political efforts/accommodations are going to benefit the largest companies and wealthiest people in our nation and leaving the small businesses and average citizens behind.

A fiscal and monetary policy action will do one of three things. It will:

  1. Benefit only the wealthiest companies and individuals?
  2. Benefit everyone (public/private, large/small, wealthy/poor)?
  3. Benefit only those that really need it (small and poor)?
Well guess which one the stock market measures, yep bucket #1. If you see the stock market go up as a result of new policy actions, it means what they are proposing will likely only benefit the wealthiest companies and individuals. In theory, there could be policies that are in bucket #2 that lead to stock price increases, but the stock market wouldn't react directly to their announcement. Only those policies that directly benefit the stock market (at the expense of others) cause market participants to react like that.

What we instead should be after are policies that directly influence #3 and not pay attention to what the stock market does. Chances are if we are doing it right, bucket #3 gets stronger at the expense of #1, and we need to be okay with that. Here are some examples:
  • Public companies are paying their employees more and sharing in the profits.
  • People are able to save more money and not need to spend it strictly on publicly listed corporations' goods and services.
  • We have strong local ecosystems and communities with less dependence on large institutions to manage our lives.
  • We have more private small businesses that are thriving and that have competitive advantages over larger corporations (and controls on large corporations from becoming too dominant).
  • Government has reduced its spending on wasteful programs that only benefit large corporations.
  • Companies are being held responsible for the climate costs and environmental damage they are doing in the form of carbon taxes or some other mechanism.
  • Executives aren't using share buybacks to enrich themselves and their shareholders at the expense of the company's ability to manage unforeseen risks like COVID.
  • Government deficits are declining and new programs that benefit the poor are being financed by taxing the wealthy.
  • Interest rates reflect the true market cost for risk taking and savers are able to earn a return that keeps up with inflation by not taking risk.
  • We have a secure stable dollar, low inflation, and prices that don't get out of hand.
All of these examples are things I would personally be all for (and I think most people would), but all would likely cause a drop in the stock market. The irony is that most, if not all, of these would actually lead to a stronger economy but get shunned because it would hurt the stock market.

We need to stop thinking that the stock market is the economy. It is not. It is only measuring the worst parts of our economy. The higher the stock market goes, the more out of balance our economy becomes.

We shouldn't fear a lower stock market. And if it does cause a depression spiral, then that is the time for the government and Fed to step in and help those in need. Government and the Fed need to step in at the bottom, not at the top. This goes for timing on when to step in and who to help. Help at the bottom not at the top.