I figured this would be a good topic for a post on the anniversary of Black Tuesday in 1929.
First things first: I am not an economist. Everything here is my own opinion and is based on the References at the bottom.
Question: Is the stock market really the economy?
Short answer: No it isn't.
Slightly longer answer: No it isn't - mostly, but the reasons are subtle.
Long answer:
About 52% of Americans own stock either directly because they own mutual funds or individual stocks, or because they invest in a 401(k), 403(b), or an IRA. That means that nearly half of Americans DO NOT OWN STOCK AT ALL IN ANY FORM. So for nearly half the country, market movements have no direct impact on them at all.
AND the richest 10% of Americans (measured by net worth and income) own 84% of the stock.
AND "(A) Federal Reserve study (using data from 2016) found that only about one-third of families in the lower half of the income scale had stock holdings. In the next 40% of the income scale, about 70% of households held stocks, while households in the top 10% of the income scale had stock ownership rates above 90%."
So the more money you have, the higher the probability that you own stock. 88% of households with earnings of $100,000 or more owned stock, while only 19% of those earning $35,000 or less did (and that mostly in retirement instruments).
In addition, less than half of Americans are invested in retirement accounts and less than 20% of Americans work for companies that offer defined-benefit pensions. And most households who do own stock own less than $5,000 worth of it.
BUT, when the economy heads south, as it did during the spring of 2020, and even though the stock market did drop (34%) initially, the stock market can still rise, partly because it's viewed by wealthy people as a good place to stash money. With interest rates near zero, savings accounts, CDs and bonds are terrible places to make money this year. The stock market is a way better bet.
So, the bottom line here is that when the stock market goes up or down, it doesn't really directly affect many people. People might be affected if the market goes down and some companies lay off workers or go out of business. But in 2020 most of these layoffs are in small businesses that don't have any stock for people to buy anyway. People may also be affected if the market goes up a lot and some companies start to hire or raise salaries. But what really happens when the market goes up is that companies either buy back their own stock to increase the value of the company (by further increasing the price of the stock), or they send the money to their executives and shareholders in the form of bonuses and dividends. None of which helps most people, even the people who work for these companies.
To emphasize this last point, from the Washington Post article cited below:
"In the middle part of the 20th century, for instance, stock market returns and wages rose more or less in tandem. But starting around 1980, the dynamic shifted: Corporations began to prioritize paying shareholders over paying workers. Stock returns took off, while wages stagnated.
The disconnect between the stock market and the job market is especially acute right now. Per the latest available data, the unemployment rate remains more than double its pre-pandemic level.
The S&P 500, on the other hand, is just 5 percent lower than its February high."
In short, nearly 20 million people who were employed in February 2020 are still unemployed 8 months after the first market slide and economic downturn despite the fact that the stock market has pretty much recovered that initial 34% slide.
So if there is any connection between the stock market and the economy it's a very weak one and it is advantageous to a very, small fraction of the population.
References (where I got my data):
On why the stock market isn't the economy:
https://www.nytimes.com/interactive/2018/02/08/business/stock-market-is-not-economy.html
and
https://tcf.org/content/commentary/stock-market-not-economy/?agreed=1
and
https://fivethirtyeight.com/features/the-economy-is-a-mess-so-why-isnt-the-stock-market/
and (a recent article)
https://www.washingtonpost.com/business/2020/10/27/401k-retirement-stocks-trump/
On the percentage of Americans who own stock:
On the effect of stock market moves on Americans:
https://www.nytimes.com/2018/02/08/business/economy/stocks-economy.html
On the wealth of Americans:
https://www.nber.org/papers/w24085?utm_campaign=ntw&utm_medium=email&utm_source=ntw
And, just for grins, here's an economist that thinks the stock market is the economy - sort of:
https://www.marketwatch.com/story/why-you-should-stop-saying-stocks-are-not-the-economy-11598295686
