If you start with the hypothesis that the price of stocks should represent the overall economy, maybe it’s not so strange that you would try to blame someone when you are proven wrong.
There’s no question that economic crises and bear markets with stocks can happen together, and it’s actually pretty unusual that we see stocks hold their own in the face of a recession as they have with this one.
There isn’t even a good correlation between the economy and stock prices though, let alone the much stronger causal link that so many just assume, for no better reason than they just assume that this should be the case based upon their extraneous beliefs that are held so stubbornly that they do not even merit examination.
No one would doubt that declines in the economy and declines in stock prices can occur together, even in a way that we could describe as probable. However, while stock prices and the economy can move in the same direction over time, when we look at the big picture, we see that they do not correlate that well overall, and it doesn’t take that long of a peek to see how wrong this assumption is, and especially that the claim that the economy itself causes stock prices to move with it, are ideas based solely on ignorance.
We don’t even have to spend much time on this, as we can just look at how stocks have moved over the last 20 years to get more than enough of a taste of these two factors dancing to a different beat more often than not.
We can start with the big crash of 2000, where the economy was performing strongly, with GDP growth over 4% for 4 consecutive years once 2000 came around. This was the last time the economy has been that strong, and it could be quite a while before it ever becomes this strong again, although we did almost get there for a time, for part of the year in 2018 anyway.
This strong economy did not prevent the market from taking a massive hit in 2000, and whatever the cause, it wasn’t a weak economy by any means. We saw the same thing with the little bear move of 2018, when years of lower Fed rates started to see the economy pick up enough to move economic growth back up to more historical levels, enough to cause stocks to move markedly the other way.
The third bear market over this time, the one in 2008, actually was accompanied by a weakening economy instead of the strong one that was present with the other two, but with two of the three bear markets of the first 19 years of the 21st Century occurring in the face of a strong rather than a weak economy, this surely does not show that the two are very well correlated at all.
We also need to look at the 10-year rally in stocks between the 2008 crash and 2020, a period where we have seen historically weak economic growth but saw one of the most impressive and enduring rallies in the history of stocks. This is also strong evidence against the strength of this purported correlation, and it’s not even a matter of our needing to disprove this assumption, as hypotheses need to be proven first before they are even worthy of debunking, and this one never got on its feet in the first place to merit being knocked down.
We might think that 2020’s results evened the score more, although while we did see some panic selling reminiscent of 2008, the aftermath, where the market has parried this economic assault so well, has left many to confront the validity of their faulty assumptions and be left mired in confusion.
Whatever the reasons behind the ups and downs of the stock market, we know for sure just from looking at these past 20 years that it isn’t the economy driving these things. Whether or not people think that the economy is supposed to or not, we can never let the strength of our beliefs trump reality like this, as much as we may want to insist.
The fact that anyone would even claim that stock prices should be a lot lower than they are given the hit that the economy is taking clearly exposes their ignorance, even when such ignorance is so rampant as it is today. The tendency when our beliefs are proven wrong is to seek to rationalize, to just claim that reality has somehow been wrong and we still are right, but beyond that, it’s just not easy for people to rationalize such an obvious divergence this time around.
We now are seeing an attempt to blame this divergence on the distribution of stocks in society, where the top 1% of households by wealth own 56% of all stocks. These wealthy folks just aren’t feeling the pain of this recession, and they certainly feel it a lot less than someone who was just getting by and isn’t now, but the amusing part is that this is held to be a reason why stocks haven’t moved down overall as a result of our current recession.
Understanding that People Move Stocks is at Least a Start
As amusing as this may be to those who actually understand stocks, ironically, this twisted view actually comes closer to reality than the common view that we should be going down without question here, as it at least accounts for the element of agency, and it is s agency that moves stock prices, not fundamentals. Contrary to what many may think, stock prices do not move by themselves, they need buying and selling from people to do it, according to their wishes and beliefs.
This is certainly a crazy idea though if we just take a quick look at the rationale behind it. The first thing to point out here is that we always want to be looking at stocks in play when we look to understand price movements, and the vast majority of this 56% worth of stocks that the wealthy hold isn’t actively traded and just sits there in an inert state when these things happen.
Big events can serve to marshal more stocks from an inactive to active state, and this is part of the reason why we see volume spike during a crash, although much of the additional volume is created by the same actively traded stocks becoming even more actively traded. We can’t look at what is primarily a group of stocks that have just been sitting there doing nothing and try to claim that they have been influential in any way.
People don’t just sell their stocks because they are hurting economically, although sometimes they do. Those in the lower range of wealth may need to sell some of their stocks to put money on the table when they lose their job, but if you are wealthy enough to be in the top 1%, you are far from living hand to mouth and no movements in the stock market will require that you sell stocks for this reason, not this time, not ever.
We therefore cannot claim that this top echelon isn’t feeling the pain of this recession enough to sell as they don’t ever get in that much pain, and have the means to ride out any move without needing to sell based upon financial difficulty, although they may of course sell for other reasons. This all cashes out to a claim that stocks would be lower if these wealthy people had to dump them to survive, and while that may be true, it is simply a factually incorrect statement that has no bearing on results, nor could it.
This claim is a ridiculous one, with no connection to the real world at all, but if you are angry enough with the wealthy, and there’s an opportunity to blame them for anything, it seems that even blaming them for good things is on the table as well. Only short sellers are disappointed by stock market strength, with the vast majority of investors rooting strongly for it to go up instead of down, and if the wealthy are really behind this, people need to show their gratitude instead of wanting to wag their fingers at these folks once again.
It seems though that we can become so drunk with jealousy that we can miss this though, where we want the sun to shine tomorrow, it shines, and we blame the wealthy for it. This view has also spawned the gamut of discontent where people are throwing in things like how wealth is distributed according to race, in spite of this having nothing to do with the current situation either. Regardless of how unhappy people are about wealth distribution, they need to try harder not to make fools of themselves this way.
There is a grain of truth in this attempt at explaining how the stock market has turned its head away from the recession though, and that’s the fact that if the wealthy are supposed to be behind this divergence, this does show that some sort of circumstance can override this purported connection between the economy and stock prices, even if they only come to this insight by way of total confusion.
That’s at least a start, whether inspired by a combination of anger and confusion or not. Whether or not these people make it to the next step, to realize that people who own stocks do whatever they choose to is another matter, and this is a leap that is far more challenging because this requires them to truly abandon their false beliefs and start perceiving reality as it is presented to us.
We Can’t Forget to Check What May Actually Be Happening
It is not enough for us to just say that the stock market does whatever it wants and we should just accept what happens without trying to understand it, although it is critical that we realize that it is the beliefs of the market that move prices. Then and only then can we proceed to looking for whatever actual correlations can be found to influence these beliefs, to look to come up with data that is actually reliable enough to want to at least pay attention to and help guide our understanding going forward.
We need to revisit the last 20 years and see if there actually is a common thread that we can integrate these moves with, and if we find such a thing, this will at least provide a better explanation than assuming correlations that do not exist.
In 2000, we saw Fed rates rise in response to the strong economy of the day, and higher Fed rates scares investors even more than a weaker economy does. Stocks don’t need to see the economy grow, but they really do not like policies that seek to contract it, which is what higher Fed rates serve to do, their sole intention in fact.
The collapse of the housing market did speak pretty loudly during the 2008 crash, but it was rising Fed rates that caused the collapse itself, when so many people took out mortgages that they could not stand rates going up so much and ended up defaulting as a result.
The Fed then kept rates very low over the next 10 years and we saw stocks continue to rise over this time. The stock market started to worry in 2018 though and several rate hikes combined with the promise of more brought on another bear market for a time, seeing the economy too strong, until the Fed told us they would refrain from this and this produced one of the best years for stocks ever in 2019, where the economy weakened again and everyone was happy.
The 2020 bear market was certainly panic-driven, but the Fed stepped in and put rates to zero again, and we were able to recover enough to get it all back in the midst of the biggest recession since the 1930’s. That’s how powerful Fed rates are and nothing, not even a depression this bad, can preempt this effect.
This is all confusing only if you do not understand. When we read the words of F. Scott Fitzgerald being used to describe all this by some in the financial media, with his describing first rate intelligence as the ability to function while battling two opposing ideas, how well these people’s intellects are functioning is much more of a matter of dispute, as is the fact that these things are really opposed.
The real test of intelligence here is to look to reconcile opposing ideas, but just blaming the alleged divergence on the wealthy is not a good use of our intellect at all, but that is what can happen when we just set it aside.
Surely, the real meaning of the Fitzgerald quote is our passing the test of being able to function in the face of such things by not having these apparent contradictions overwhelm us so much that our intellect actually becomes dysfunctional, to the extent that we are unable to reason through them.
Fitzgerald’s quote is more apt than they realize, they just don’t get the fact that they failed his test.