Monday, September 07, 2015

The stock market doesn't predict the economy

It is interesting to see so much concern in the news over recent losses in measures of the securities markets like the Dow Jones Industrial Average. Since the high of more than 18,000 in May of this year, the Dow has fallen to just a tad over 16,000 today. That's about an 11% drop over 4 months and most of it appears to be over concerns that Chinese stocks are having trouble supporting their bubble prices. Now that the bubble has been partially deflated, most markets are breathing easier.

What I also find interesting is that the day-to-day fluctuations of the securities markets, particularly with stocks, offers the average person almost no clear indicator of how the personal economy is doing. In May of this year the Dow reached an all time high. Who prospered from this event? Was it the average worker among workers? Not really. Most people who do own stocks, have some money parked in an IRA and if they're lucky, they're not going sideways. Their portfolio goes up and down day to day, but the realization of true prosperity is rare and fleeting at best in the IRA. The simple fact is that most of us are not expert investors. Only a tiny fraction of us are high speed traders.

It is also worth noting that the vast majority of stocks are owned by the 1%. What do I mean by the "vast majority"? It's hard to find recent data on stock ownership, but the most recent data I found contain these very interesting nuggets:
The richest 5% of U.S. households owned about 2/3rds of all stock in 2010.
The bottom 60% of U.S. households own a mere 2.5% of outstanding shares of stock.
That data is probably about 5 years old, but given that wages have stagnated since then (while CEO compensation continues to rise), I doubt the numbers have changed even a smidgen. Suffice it to say that for at least 60% of the US population, how the market moves doesn't really affect our day-to-day economics.

The takeaway is that China can no longer support the enormous trade surpluses and 6-8% growth it has enjoyed for so long. As trade slows, the balance of accounts will straighten out between us and them. The world economy will slow. Then it will be up to governments around the world, including the US government, to increase demand by spending money.

America doesn't have to accept a slower economy from China or the stock market. Capital hates labor so equity owners won't hire to grow the economy. That means governments must spend money so that the people they serve may prosper or even maintain their standard of living. There are thousands of infrastructure projects we could pursue all over our country. Bridges are getting older, roads are deteriorating and there is fiber to lay for the networks of the future, if not today. Yet, if we watch the financial networks like CNBC, Fox Business, and Bloomberg, we are led to believe that our fortunes are tied to the securities markets when most of us don't even own enough securities to influence corporate governance in the companies we own stock in.

If we're lucky, we have jobs that pay our bills. If we're really lucky, we enjoy the jobs we have and can still pay our bills. But the demand for those jobs will come from government spending if the wealthy are busy parking their money offshore, waiting for a time to spend that money or just trying to turn a bottom line number into happiness.

In short, the ups and downs of the stock market are just a fantasy for most of us. If there is a steep decline in the markets, it won't have much of bearing on our personal fortunes if at all. Even Forbes will tell you that the stock markets are lousy predictors of the economy. A better predictor of the economy is who is in the White House and Congress. Just ask Forbes. 80 years of analysis has shown that when Democrats are in power, the economy grows.

Shouldn't that be news somewhere? If not, where is the liberal media bias? Isn't it interesting that economy has more to do with our decisions than something else around the world that "just happens"?
Post a Comment