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Stock market reckoning is coming

boushey-heather-col-sigWhen the stock market surged last week, President Donald Trump was quick to tweet, “The Dow Jones Industrial just closed above 29,000!” The picture changed a bit after the Dow slid 800 points a few days later, largely driven by the poor performance of tech stocks, which continued after Labor Day weekend.

It’s understandable why the president wants to use the markets as a measure of the economy’s health, even as unemployment hovers at 8.4 percent and many businesses remain crippled. Since the start of the year, the Standard & Poor’s 500 index — even following the recent drop — is up 4.3 percent, and the Dow is down a mere 3 percent. If stocks were the sole measure of economic health, you might think the economy is on the mend, perhaps even poised for a breakout.

The president and his supporters are ignoring what former Federal Reserve Chair Janet Yellen recently forcefully explained: “The stock market isn’t the economy. The economy is production and jobs, and there are shortfalls in virtually every sector . . ..”

Yet how has the stock market remained so resilient in the face of such a severe economic shock? In part, it’s because of inequality. Stocks are overwhelmingly owned by the top 1 percent, which means speculation can continue even as more people lost their jobs at the onset of this recession than at any time since the Great Depression.

What’s more, measures such as the Dow and S&P 500 reflect only the very largest U.S. companies, which can weather steep slumps in demand in a way that Main Street enterprises can’t — while the relief packages Congress passed this spring were better at shielding large companies from economic harm than smaller ones. Given how troubling the underlying economic data are, the immunity of the markets can’t continue (as we may be seeing this week).

When we compare the stock market to jobs data, the numbers are sobering, indeed. Spring’s temporary job losses — caused at first by the shutdowns — are settling into a long-term pattern of economic malaise that could reduce low-income and middle-class families’ income for years to come.

Although unemployment has dropped from its height of 14.7 percent in April, last week’s jobs report from the U.S. Department of Labor’s Bureau of Economic Statistics indicates that job losses once thought to be temporary are becoming permanent.

Fed’s intervention

Even big companies need customers. When overall demand sinks, why wouldn’t that be reflected in share prices? In part, the answer is that fiscal policies enacted by Congress, and monetary policies put in place by the Federal Reserve this spring have disproportionately benefited corporations.

The Federal Reserve announced in March that it would pump several trillion dollars into the financial markets by continuing its so called quantitative easing — purchasing assets directly in the financial markets to support asset prices, while also buying about $1 trillion worth of bonds from big companies either directly or indirectly in secondary markets.

As a temporary solution, it’s working. Trillions of dollars spread around by the Fed now support not just stock prices and corporate bonds but even junk bonds, real estate investment trusts, and private equity firms that continue to borrow at rock-bottom rates, taking advantage of the downturn and sustaining their own debt-laden portfolio companies. These financial-market stimulus efforts continued apace even as enhanced federal unemployment insurance benefits expired at the end of July.

Near-boundless support for U.S. financial markets, however, won’t save the real economy from a continuing recession. While it’s true that propping up asset values can stave off a financial crisis (for a while), it can’t deliver the broad economic stimulus needed to bring unemployment figures down — let alone protect Main Street’s businesses and workers.

Jerome Powell, chair of the Fed, has repeatedly said that his institution can’t keep equity and debt assets propped up if the economy continues to deteriorate. Businesses are still going bankrupt. Low- and moderate-income renters who are unemployed are preparing to fight evictions in the coming months, as moratoriums end.

And workers in industries hardest-hit by the pandemic — think airlines and big hotel chains, among others — who initially kept their jobs are now joining the ranks of the unemployed.

Amid all this, one thing remains clear: For Wall Street, too, there will be a reckoning.

Heather Boushey is president and CEO of the Washington Center for Equitable Growth. This column first appeared in The Washington Post.