How the stock market differs from and can perform differently than the economy while remaining highly dependent on the economy for its success.
Topics covered include:
- Why the stock markets in countries with lower economic growth performed better than the stock markets in countries with higher economic growth.
- How the top 5 stocks in the S&P 500 Index have the largest weighting in 30 years and what will it takes for these stocks to outperform the market.
- What are the largest contributors to U.S economic growth, most of which are not publicly traded.
- How the U.S. government and the Federal Reserve saved the stock market.
- How have stocks performed during economic recessions.
- Why it is risky for investors to be dependent on the financial prospects of the largest technology stocks.
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 298. It’s titled, “The Stock Market is Not the Economy, But It Sure Depends on It.”
The market is not the economy
The top 5 companies in the S&P 500 Index, this is a measure of U.S. large-company stocks, are Microsoft, Apple, Amazon, Facebook, and Alphabet, which is the parent company to Google. Those 5 stocks comprise 20.4% of the index. The highest level in 30 years. Their performance through April, for those 5 companies, is they gained 10%. This in the face of the worst global pandemic since 1918. The other 495 stocks within the S&P 500 are down 13% year-to-date through April. This is data according to Goldman Sachs.
Eric Levitz in the New York Magazine wrote, and it’s a little bit satirical, “A growing number of Wall Street investors and analysts have made peace with the dissidence between the market’s fortunes and their own. In their view, capitalists haven’t lost touch of reality, equity values simply no longer depend on the functioning of society. The market isn’t the economy. Capitalists don’t need it to be safe for you to leave your house or possibly for 30 million unemployed Americans to find jobs in order to make healthy profits. The next industrial revolution will be live-streamed. Come on in the S&P 500 is fine.”
Sarah Ponczek wrote in Bloomberg, “The market isn’t the economy, though it’s at least a reflection of it and a bet on what will thrive in the future. Unsurprisingly, amid a crisis bent on keeping everyone at home, bets are coalescing on companies that ease the burden of being locked indoors.”
She quoted Jack Janasiewicz, a portfolio strategist at Natixis Investment Managers. They oversee $1 trillion in assets. He said, “The eye-opener is when you when you look at the ones you’re worried about,” he’s talking about stocks within the S&P 500, airlines, leisure companies, “it’s not a big chunk of the S&P 500. It’s the old adage, where the market isn’t the economy.”
That really hits an important piece here. A lot of the stuff we’re worried about, it’s just not a big chunk of the S&P 500. So maybe we did overreact by selling off 35%.
Finally, Matt Philips of the New York Times wrote a piece titled, “Repeat After Me: The Markets are Not the Economy.” He wrote, “The stock market looks increasingly divorced from economic reality. The United States is on the brink of the worst economic collapse since the Hoover administration. Corporate profits have crumbled, more than a million Americans have contracted the coronavirus and hundreds are dying each day. There is no turn around in sight, yet stocks keep climbing. Even as 20.5 million people lost their jobs in April, the S&P 500 stock index logged its best month in 33 years.”
The top 5 companies in the S&P 500 employ about 1.2 million workers worldwide. The U.S. has 133 million employed workers. Last month, it was 156 million. Over 20 million jobs lost. Those 5 companies’ employment makes up only 0.9% of jobs. And across the entire S&P 500, those companies only employ about 17% of U.S. workers.
What other evidence do we have that the stock market is not the economy? We’re going to explore that in this episode.
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