Saturday, May 25, 2024

McHugh David: The stock market a total economic indicator? I surely hope not

by BIZ Magazine

There’s quite a bit of chatter on national media and social media regarding the stock market bounce back after some pretty substantial losses – mostly due to COVID-19.

For those who don’t know, unemployment climbed to just shy of 15%. With certain sectors of the economy slowing down or stopping all together, jobs were shaved or lost completely.

In some states, unemployment climbed near 40%. According to, real time unemployment in Kentucky was as high as 40% at one point.

Louisiana was in the mid-30s, according to the same site, while the state is reporting a more conservative number – around 25%.

Livingston Parish is currently second in the capital region, with roughly 18,000 unemployed. And yet, according to the federal government, unemployment dropped from 14.7% to 13.3%, or 1.4% decrease in those that are unemployed.

First, let’s acknowledge that this is a very good thing. COVID-19 and the responses from individual states were devastating to economies – especially local ones – and any representative data that shows trends in the opposite direction are a great sign.

But the S&P 500, DOW, and other indexes had experienced almost record-breaking drops due to the COVID-19 show-stopper, but this happened over a 60-90 day period.

A 1.4% dip in unemployment would cause some of those losses to be completely recovered in less than a week period? It doesn’t make sense.

Except it does.

In 2020, most investment protfolios that run through group-based investment apps or brokerage mutual funds are run through algorithms – a formula that says, ‘if A, then B.’

Except much, much more complicated.

But as jobs reports came out, the various levels of alogorithmic ‘invisible handing,’ for you Adam Smith fans, either hit investors with a notification, perhaps their broker reached out in an e-mail after receiving the push for buying, or the algorithm just purchased more stock for those playing long positions.

But, you might say, ‘That’s great! Everyone in America is getting richer as the market continues to climb!’

No, it doesn’t.

First, market growth reflects more money injected into corporate coffers. That raw number reflects dollars being transferred into company troughs in the belief that the company will continue to improve and the price of their stock will go up, until such time as they decide to issue a dividend, or split.

Now, moving beyond the fact that when companies were presented with a tax break to repatriate funds and they did so, but used it to pay down debt, take a look at the analysis of the current financial health of those who invest in the stock market through the Financial Samurai (featured in the Wall Street Journal, Forbes, Bloomberg, among others):

According to the Federal Reserve, of the 10 percent of families with the highest income, 92 percent owned stock as of 2013, just above where it had been in 2007. But ownership slipped for people in the bottom half of the income distribution, and to a lesser degree for people who were above the median but below the top 10 percent.

As of 2020, the top 10 percent of Americans owned an average of $969,000 in stocks. The next 40 percent owned $132,000 on average. For the bottom half of families, it was just under $54,000.

We’ve seen a massive rise in the S&P 500 since 2009, meaning that serious wealth has been made by the wealthiest of Americans. What’s even more astounding is that the top 1 percent of households by wealth owned nearly 38 percent of all stocks shares according to research by NYU economist Edward Wolff.

Surprisingly though, stock ownership has fallen to only around 52% overall since the financial crisis. This is shocking and unfortunate since the S&P 500 has been marching to new record highs each year. Check out the latest data below. This is the latest data we have for early 2020.

What’s fascinating is the report goes on to show that those in the 70th percentile and lower have a net worth of less than $250,000. Those in the 50th percentile and more have less than $100,000 in net worth.

Combine both points – the Financial Samurai report as well as the algorithm – and it shows that the stock market is more of a reflection of how computers feel about the corporate landscape.

Which is a part of total economy, alongside trade, industry, the job market, wages – a huge numbers of variables.

It also shows distinct ability to be tricked. An unemployment figure dropping 1.4% does not symoblize ‘recovery.’ It brings the beginning of a recovery, but it will take some time.

Think of the wealth distribution, so stock market gains benefit just over half of America – the rich more than others, as wealth is distributed in larger portions for the more rich.

Now, take a look at the wealth distribution in Livingston Parish – to bring it on home.

An oft overlooked report by the Capital Area United Way said that over 40% of Livingston Parish residents are poor – meaning they can’t afford basic necessities – or working poor, meaning despite having a full-time job they need assistance to afford basic necessities.

Let’s chunk in a 20% illiteracy rate in the parish for good measure.

60% of the parish, on average, lives above that mark – or what’s designated as ALICE (Asset Limited, Income Constrained, Employed). According to the study, $54,000 is the minimum for basic needs for a household of two parents, two children. Basic needs were outlined as –

  • Housing
  • Childcare
  • Food
  • Transportation
  • Health Care
  • Technology
  • Miscellaneous
  • Taxes

The good sign? According to the Census Bureau, the median income for Livingston Parish was $67,000 – or roughly $1,000 extra per month over the ‘basic necessities.’

But, when breaking down those necessities, some glaring issues poke through – housing for a three-person family at $715? Nice try. The average home price has increased beyond $200,000, which puts a mortgage with 20% down payment at $1,100.

Many of those

Transportation for that same family, including Louisiana-based insurance? $644, good luck.

Thinking of those numbers, and the probable increases in some of those categories, it’s hard to believe that a very large percentage of Livingston Parish residents have enough stocks to be lauding growth in the market as an ‘economic indicator.’

If you’re staring at your portfolio or 401(k) and seeing big gains, that’s great – but you’re in the minority.

The market should not be lauded as an overall economic indicator, or even a large percentage of the movement of the economy. It’s just one piece of a very vast puzzle – and it can be a fickle mistress.

J. McHugh David is editor and publisher of the Livingston Parish News.

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