Why does the stock market keep going up?
The interviewer asked Mary Childs, the economist and co-host of NPR’s Planet Money program, why the stock market seems untethered from the news. The stock market keeps hitting new highs, while news about the economy continues to be dismal. Childs answered something like this: “The standard answer is that the stock market is forward-looking. Whatever has captured our interest in current developments, the market gets determined by what will happen in future months.”
Later in the interview, Childs discussed factors which disturb the economy at this moment, and potentially could cause trouble in the future. The coronavirus pandemic rages out of control. Vaccines may help bring it under control, but supplies of vaccines lag, and the infrastructure for delivering vaccines has sputtered. New mutations of the virus may be more contagious, more lethal, or resistant to the current vaccines. No one knows, and no one can know, how long immunity to the virus will last. Unemployment remains high, with prospects for re-hiring workers who have lost their jobs unclear. After transformation or closure as a result of lockdowns, several whole industries face an uncertain future. Climate change has brought the predicted disasters, droughts, floods, hurricanes, wildfires, and, or course, heatwaves. Benefits for the long-term unemployed are running out, foreclosure protection is running out, loan moratoria are running out, and Government relief depends on the uncertain possibilities for new legislation. Will legislation die in continuing gridlock? Especially in the aftermath of the capitol insurrection, no one knows how the new House and Senate will function. The capitol insurrection also carries the threat of political instability such as we have not experienced since the Civil War.
Those are the known unknowns. By definition, we cannot predict the unknown unknowns. The stock market goes up and up because it looks to the future, Mary Childs reassures us. In fact, during this entire year of horrifying news, the wizards have known that the economy was getting steadily better, and it still is getting better. Childs does not tell us which wizards know what will happen to the economy in the future, and therefore guide the stock market rationally towards that sunny future.
The question seems pressing, because in the same interview, Childs explained what has happened to the price of shares in GameStop. She can explain each market fluctuation as the shares became thirty times as valuable in the course of a few trading days – a price run which ruined some Wall Street insiders, who did not plan for this development. The market does not invariably behave rationally.
So if the stock market does not actually know the future, and it does not necessarily behave rationally, why does it continue to go up even as events disrupt the real economy, the climate, and the Government?
I do not think wizards are causing this bull market.
So what is?
- All this economic turmoil has hardly touched the wealthiest strata of society. People who live off their investments and people who work remotely from their computers at home have lost no earning power, but have lower expenses for commuting, and have lost opportunities to spend on travel, restaurants, and entertainment. As they continue to prosper, they have more money to invest. It goes into the stock market, and drives prices up.
- The Federal Reserve is keeping interest rates at near zero. Bonds promise a return of nearly nothing. Investors therefore decide not to go into bonds, but rather into stocks, driving the price of stocks up.
- The Federal Reserve has some arcane-sounding programs “to prop up the economy” in mysterious ways. Cutting through the jargon, the Federal Reserve creates money to buy bonds and stocks, thus driving up the price of stocks and bonds.
- The Federal Government has run at a deficit for decades. The last year without a deficit happened in the Clinton administration. Under the Trump administration, the deficit has accelerated. Basic economic theory insists that prolonged deficits create inflationary pressure – economists call that a law. But, measured by the cost of living for an urban working class family, inflation has remained below the two percent target year after year. That seems to break the economic law. How is that possible? Inflation does happen, but not for working class families, whose income has remained stagnant. The newly-unemployed do not have extra money to spend. Many small business owners (especially restauranters and gym-owners) have much reduced buying power. The new money flows into the pockets of the already rich, who do not buy more groceries with their new-found wealth. They may buy luxury items (the price of yachts may go up), but generally, when rich people make more money, most of the money goes into investments. That drives up the price of stocks.
In short, the stock market does not bring rational rewards to clairvoyant wizards. Instead, it accurately tracks an economic system that benefits the wealthy.