In the US, the stock market had its best August since 1984. Some have predicted that this markets rally will become the ‘greatest rally of all time.’ But how long can this staggering gap between US stock markets and the performance of the US economy really last?
Share prices are supposed to be driven by economic fundamentals. If an economy is booming, profits are likely to rise, so investors will pile into blue chip companies betting on an increased return. More careful investors will pore over corporate earnings, balance sheets and annual reports to get an insight into which companies are likely to outperform their competitors in such an environment. In both cases, when investors buy shares, the assumption is that they are doing so in expectation of future profits.
Today, many market watchers are asking themselves why investors are betting on rising profits when we’re living through what could become the most significant economic crisis in a century.
While the number of new daily cases is now trending downwards in the US, experts are warning that – like in many other parts of the world – the virus could spread more easily as lockdown measures are eased. Even if we don’t see a substantial rise in new cases over the next several months, the pandemic has brought the US economy to its knees.
Unemployment seems to be hovering at around 10% and trending downwards, but the figures are highly uncertain due to issues categorising furloughed workers, large differences between different unemployment metrics and time lags. Some economists put the figure for unemployment as high as 15% – the truth is, we simply don’t know how bad things are right now.
What we do know is that people are suffering – a lot. Until the CDC declared that halting evictions was necessary to avoid exacerbating the public health crisis, up to 40 million Americans were at risk of eviction. Inequality in the US was already soaring before the pandemic hit, and as I argued in Tribune last week, pandemics tend to increase inequality.
Tentative signs of recovery seen since the depths of the crisis in March are likely being driven by the spending of wealthier households, buoyed by their stimulus cheques and the wealth they have stored up in assets like equities. But the effects of the stimulus package will wear off soon, after which point households are likely to realise the full extent of the crisis and start saving rather than spending.
Even if wealthier households continued to spend as they are now, the US economy simply could not continue growing if unemployment remains as high as it currently is. Poorer families consume a significantly larger portion of their income than richer ones, so falling incomes among the less well-off can have a disproportionate impact on demand. And high levels of unemployment have a whole host of social and political implications that are likely to impact future growth.
What’s more, a senior Federal Reserve official recently warned that the US was by no means out of the woods when it comes to the threat of a Covid-19-induced financial crisis. If millions of families remain unemployed, many will be unable to repay outstanding student loans, store credit, credit card debt, and mortgages. If defaults start skyrocketing all at the same time, it will take another huge intervention from the Federal Reserve to prevent another financial crisis.
It is true that US firms also make a lot of money abroad, but the global economy isn’t doing much better than the US. In part, this is because US workers are the global economy’s consumers of last resort. Emerging markets have seen exports and remittances collapse due to falling demand in the rest of the world – not to mention a debt crisis being driven by the flight out of emerging market currencies and into ‘safe’ dollar denominated assets.
After 2008, it was China that pulled the world towards recovery with a huge stimulus package – but from the trade war to a mounting debt crisis, the Chinese economy has enough troubles of its own today. With demand from European and American consumers likely to remain repressed for the foreseeable future, and China unlikely to step in to save the day, it is hard to see where the global recovery will come from.
In short, it’s hard to see why any rational observer of the US economy would be ploughing their money into equities right now. Profits simply aren’t going to look good for the average US company in the context of mass unemployment, a global economic slowdown and significant downside risks like a resurgence of the virus or a COVID-19-driven financial crisis.
The current stock market rally is being driven by two things: the Fed and monopoly power. Central bank asset purchases have historically pushed up asset prices by reducing returns on government bonds and encouraging investors to ‘reach for yield’ by putting their money into other assets. In other words, the Fed pumping money into the financial system has pushed up share prices.
Today, investors are banking on the fact that the Fed is targeting asset prices. Investors’ interests are protected by an ‘independent’ central bank, which is in reality captured by big finance. They know that no matter what happens to the real economy, the Fed won’t let stock markets tank.
The other factor is the monopolisation of the US economy. Monopolistic firms generate higher profits because of their market power: they can push down wages, gouge suppliers, avoid their taxes and – as a last resort – increase prices. What’s more, low interest rates have made it cheaper for these firms to borrow money to facilitate their expansion, whether by investing themselves or – more likely – buying up other corporations.
Nowhere is this trend towards monopolisation clearer than in the tech sector. Indeed, the stock market rally has largely been driven by the performance of US tech stocks, which now account for a fifth of the entire value of the S&P500. Many other companies aren’t doing so well – 62% of stocks in the S&P500 still haven’t returned to pre-COVID-19 levels.
What does all this mean for the wider economy? Roaring asset markets in the context of a depressed real economy will simply increase wealth – and therefore racial – inequality, as well as making future financial crises more likely. And the growth of monopoly power will compromise wage growth, increase inequality, reduce corporate tax revenues and constrain productivity growth.
Even if these trends don’t ultimately catch up with the stock market (they will), their political implications will be profound. Rising inequality is associated with higher levels of corruption and violence – and the US hardly needs any more of either of those things right now.
What the gap between the stock market and the real economy shows us is that a tiny cabal of central bankers, politicians, wealthy shareholders and chief executives have a stranglehold over the US economy and they’re using their power to further their interests – at the expense of the interests of working people.
The fight for economic, environmental and racial justice has never been more urgent. If progressive forces don’t achieve a Green New Deal soon, America will continue to deteriorate into a country of two halves: one for the rich, and another for the rest.