Reality Catches up to the Stock Market

The official unemployment rate is 14.7%, and the real unemployment rate is at least three percentage points higher by the Census Bureau’s own admission of its miss-classification error. Over 40 million workers have filed for unemployment compensation since the economy shut down because of COVID, and just today, another 1.5 million filed. In total, over one-quarter of the pre-pandemic workforce has been laid off at one point or another. Despite this, the stock market performed as if it were on another planet over the last several weeks – that is, until now.

By the start of the week, the market had regained all of the losses it incurred for the year 2020.  Investors were banging their chests about a V-shaped recovery. Then the slow bleeding started two days ago, and today, the market has tanked by over 1000 points. A heavy dose of reality set in.

The reality is this. New projections estimate that deaths from COVID may reach 200,000 by the end of the summer-perhaps threatening to force another full or partial shutdown. Furthermore, the economic recession, the steepest since the Great Depression, will not likely taper off until 2023 – according to FED Chair Jerome Powell. While the lights to the stock market party have not yet been turned off, their glare is dimmer.

President Trump puts all of his eggs in the stock market basket and the Federal Reserve has too often accommodated his wishes, rather than doing what’s best to stabilize the economy. This twisted logic has led too many casual observers to think the economy is good as long as the market is – wrong!

The irony of the current situation is that the recovery could be more robust had Congress given as much consideration to ordinary consumers as it has to investors. To date, the Federal Reserve has expanded debt on its balance sheet to $7 trillion –to keep liquidity in the market, support government and corporate bond prices, and prop-up mortgage-backed securities.

Those extraordinary efforts have primarily benefited the wealthiest 10% of American households who hold 84% of the total value of household stock ownership. Not only are major corporations bailed out, they can borrow money at near-zero interest rates. If they falter still, their bonds are bought up by the FED – instead of allowing them to be downgraded to junk status.  In contrast, tens of thousands of ordinary workers must sit daily in their cars in food lines that stretch miles.

Even the paycheck protection program is heavily skewed toward well-heeled small business owners, while those who operate the smallest enterprises are struggling to survive. Yet, it is they who generate most new jobs. Small businesses routinely create two-thirds of the net new jobs in the economy, and at the depths of the Great Recession, their contribution reached 80%. Most of that contribution comes from businesses with 50 or fewer employees. In comparison, the behemoth corporations are aggressively downsizing and have been for decades. The latest announcements include Chevron, which will cut nearly 5,000; Boeing, 7,000; United 3,400; Uber, 3,700; Airbnb, 1,900, etc.  

The point is that the federal recovery strategy is upside down. The most considerable support is going to Wall Street investors and corporations that are cutting the most workers.  In fact, the FED is being accused of creating a stock market bubble.

Consumer spending by ordinary households carried the expansion before the COVID shutdown, and there will not be a vigorous recovery until more stimulus income reaches their hands. Alongside that, more funds must be allocated to state and local government, who are at the forefront battling COVID. The reality that this is not yet happening is just now catching up to the stock market. Welcome to the real world!

Photo by Markus Winkler on Unsplash