On any given day, we often read headlines or glide over stories about developments in the stock market. Whether that be daily changes in index funds or the rapid decline of a Fortune 500 stock, there is always one underlying assumption: we want a growing stock market. Yet, beyond this oversimplified reality that plagues much of the country, a much different, more complex truth exists.
In the Midst of a Pandemic
The stock market and the economy are two different things. While we often synonymize the health of one with the health of the other, it’s deceiving. The stock market is based on expectations. People invest money with an outlook of the future, not what’s happening in the present. So even if an economy is struggling, if there are positive expectations for the future, the stock market could still remain stable. Moreover, investors aren’t always right: they could predict the economy recovering from a recession, but if that doesn’t happen, the stock market will only reflect the predictions and not the outcome.
For instance, following the global outbreak of COVID-19, global supply lines came to a near-complete halt. Production across the world dwindled, and many stocks took a significant dive. However, as the virus continued to spread and countries remained locked down, an unexpected thing happened. Stock prices remained stagnant if not improved. Even with unemployment surging, and more and more companies filing for bankruptcy, the market almost seemed unaffected. In fact, the S&P 500 recorded its best month in 33 years this spring. It was a clear demonstration of what really drives the stock market: large financial firms.
Firm Control
We often imagine the stock market as an open trading venue, where ordinary Americans hold a collective say into the market's outcomes. However, this is a radical simplification in terms of who actually holds the fate of the market. Yes, a substantial portion of the funds in the stock market is owned by the working class. However, most of this wealth is ceded to the control of large corporate financial firms, so the power is essentially left with them. So when Americans began to struggle with the current pandemic, the market didn’t react as the firms who held control of the market didn’t experience such hardship. This in turn led to an overly-optimistic investment strategy, as many companies benefited from this unprecedented time. As their paychecks increased, they saw no need in changing anything. In addition, they had overly high hopes for the United States’ recovery from the pandemic. Like many others, investors banked on the idea that things would “return back to normal” at some point, creating even more disconnect from the markets and our economic health.
Alternatives
Aggregate Output - Also known as gross domestic product (GDP), this metric measures the total amount of goods and services produced in a country in a given year.
Unemployment Rate - This measures the percentage of people who are looking for work out of a country’s entire labor force.
While no perfect measurement exists, public awareness of practical economic health extends beyond the benefit of just individual gain. When people understand the true driving forces behind any modern economy, it can lead to large scale, systematic change. By continuing to rely on an inaccurate measurement, people will remain ignorant to our economic well being.
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