If you watch the news, you have probably noticed two things: the economy is struggling, and the stock market is booming. I always thought that the stock market was part of the economy, with the economy being the bigger picture of how the country is doing and the stock market reflecting that. I was totally wrong. The two are only loosely connected, as one can clearly tell at this point. The question is, why?
What is the Stock Market?
The stock market is basically what it sounds like: a big marketplace where people can buy or sell portions of ownership of companies and groups of companies in related industries. People who invest in the stock market are basically doing so based on what they think will happen to these companies or industries in the future. The stock market is dominated by some massive companies and industry sectors. Many businesses are not publicly traded, and thus not reflected in the stock market at all. In fact, the number of companies represented has shrunk significantly in the past decade.
What is the Economy?
This is a broad term for a country’s resources, and the demand for them. Supply and demand are terms that describe what drives a capitalist economy like the USA. There are a number of indicators that tell us if a country’s economy is doing well. These include things like the price of crude oil, consumer confidence levels, unemployment numbers, and sales of goods and services of various types. The bond yield and interest rates also play a role.
COVID-19 and Stocks
A few companies and sectors have done extremely well during the pandemic. These companies have driven the stock market to record breaking heights. There was a small dip when the country was in lockdown, but once companies figured out ways of doing business that worked even though their workers stayed at home, the market rebounded. People who were stuck at home bought things from the internet more than they did by going to local stores. This drove up the stocks for companies that provided shipping services, delivery, and essential goods and services.
Aside of increased demand for some goods and services, the stock market is based on what investors think will happen. In the case of COVID-19, it seems investors are betting that once there is a vaccine or a return to “normal”, the value of company stocks will go up. This causes investors to buy, which makes the cost of the shares increase. Also, when a company’s earnings have decreased, a temporary decrease in stock price often follows, which in turn leads to a big buy of those stocks, leading to an increase in those stock prices, all while investors hope they eventually gain even more value. The government has decreased the interest rates, so people have been putting more money into stocks than bonds, CDs and savings accounts.
COVID-19 and the Economy
America is still suffering from massive unemployment. Many businesses remain closed. The virus infection rate is increasing at an alarming rate, and there is concern that it will require a return to lockdown to get it under control. People who are out of work are facing mounting bills and little job prospects. People are not spending as much money on travel or non-essential purchases, so these businesses continue to suffer. The housing market is expensive due to decreased inventory, but may be headed for a crash as people who are currently protected from having to pay rent or mortgages are asked to do so and find that they do not have the money. This could lead to vast foreclosures. While some businesses may be doing ok as they learn to change their business model, many are devastated and have had to close their doors forever as the stimulus money that may have kept them afloat has run out.
These are hard times, around the world and in America. There is a massive disconnect between the stock market and the overall economy, and this is highlighting the fact that the two are not the same thing at all. For most people, it is the economy that they feel in everyday life. The cost of goods and services as they rise and fall. The availability of resources, or lack thereof, as demand surges beyond supply. The loss of jobs, and the rising cost of housing and healthcare. These are the things that affect the people. So next time you see the stock market soar, do not take it to mean that the economy is doing the same.