'The Steady State: Have We Recovered?'

Ayush Kumar

Columnist


While some officials have already started celebrating the “V-shaped” recovery of the COVID-19 financial crisis the reality could not be far from it.


The general argument used by those in favor of proclaiming the crisis to be over is to look at the stock market, and while they would be right in pointing out that the stock market has recovered, the crux of their argument is that of optimism i.e. the consumers feel comfortable about their future and thus the stocks sore.


They proclaim that this optimism indicates that people are doing good or the very least are expecting things to be better in near future.


These expectations are generally assumed to be rooted in rationality and therefore with a rise in the stock market we are seeing general recovery, this entire argument however is absurd, especially under the current circumstances.


A graph by FRED illustrating the almost inverse relationship between the economy and the stock market. Photo courtesy of FRED and Dow Jones.

Consider Figure 1 we note that average consumer sentiment is especially in disjunction with S&P 500 since the beginning of the most recent recession (March 2020), meaning that the stock markets may be a proxy for consumer sentiment, however the consumer in this case is certainly not average.


At this point it is worthwhile to investigate who actually invests in the stock market. For this I investigate data from the Survey of Consumer Finances for 2016 (latest available) conducted by the Federal Reserve. I find that while generally speaking 52% of Americans had invested in the stock market, a large chunk of them had invested through retirement accounts such as 401(k)s. A mere 14% of Americans are directly invested in individual stocks. Among various family income groups the proportion of investors is largely skewed towards family groups making more than $100,000 a year, this family income group is by no means average (which according to the US Census was $57,617 in 2016). Further I find that while 61% of non-hispanic white families have invested in the market in one form or other, a mere 31% of black, and 28% of hispanic families have invested. Based on this analysis we can reasonably conclude that a general stock market investor is an individual belonging to a well off individual.


Therefore when we hear politicians say that the market is up again and that we are doing fine, we now know what they mean, they mean that the markets are up and families who are well off are doing fine. But now let us explore why the rich are investing in the market in midst of a recession, Krugman (a Nobel laureate) notes that since the investors are investing in the market partly because they have nowhere else to go. As the interest rates on US bonds go below the expected inflation rate stocks appear to become more lucrative for investors. Given that the average investor is well off the additional investment they have to make is generally of low immediate consequence to them, meaning they are more likely to be optimistic about the distinct future. This mentality can be gauged by the fact that the recovery in the stock market is largely driven by a handful tech companies. Thus, given other options the families who are well off may consider it to be optimal to invest in the market. Given the general investor is well off it follows that the market is on the rise.


While the families who are well off are having trouble deciding where to invest their money, a large part of the nation has to live under difficult circumstances. These circumstances are exasperated when politicians “act” under the assumption that the stock market is representative of the economy, thus concluding that the crisis is over. While high wage employment is close to its pre-pandemic levels, low wage employment is 15.4% below what it was in January 2020. Low wage workers, who generally belong to minority families, suffered disproportionately when additional unemployment funding from the CARES Act expired on July 31, 2020. This leaves families without the ability to pay for housing, insurance, schooling, etc.


Now that we understand that how fluctuations in the stock market are not necessarily a reflection of the economy, it should be easier for us to see right through the absurd nature of arguments claiming the “fantastic STOCK MARKET numbers” indicate economic recovery from officials or otherwise.

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