The Market is Not the Economy
"The market is not the economy." That's a phrase I've been bouncing around in my head for a few months now. I've been meaning to write about it here for some time. Alas I scooped my blog by posting it at work, in response to our CEO. 😨 In a public forum. 😰 At an all-hands meeting. 😱
The point of the phrase is to rebut the common association people have been making that stock market indices measure "the economy"; that when the market averages are at highs "the economy" is doing well, too. As I explained in my company-wide Slack comment, the stock market is more a reflection of how the wealthiest 10% of the population- and especially the top 1%- are doing than anything else.
Why is the market only a measure of the rich? For one, approximately half of all Americans don't even own stock, either directly or through their claims in a pension plan that holds stocks. Two, almost 85% of stock wealth is held by the top 10%. And three, the top 1% own half the total market.
So, if the stock market is not an adequate measure of the broader economy, what is? I propose it's a set of 5 things:
1) The stock market. Okay, let's start with this. Market indices do measure how the wealthier end of the population are doing. And they're tabulated on a daily basis, updated second by second, to several decimal places. So they make compelling daily news even if they're unrepresentative of the country as a whole.
2) Median income. This measures how the broad middle class are doing. Note the average to use is the median, not the mean. The mean is skewed upward by the sky-high wealth of the top 1%. Update: I wrote a separate blog entry about Mean vs. Median as it keeps coming up in how news stories are misreported and/or misunderstood.
3) The poverty rate. We've got to measure the poorest end of the economic spectrum, too.
4) Unemployment and under-employment. The ability of workers in the economy to find suitable work drives both overall economic health and individuals' economic well-being. This one ought to be obvious. And it's also part of the crazy situation that spurred me to write this article. The stock market has recovered nicely from its losses a few months ago, but the unemployment rate is still high and trending worse. For 10 years these two figures (market average and employment rate) have mirrored each other, moving in tandem in opposite directions. Now they're completely off the rails relative to each other. This is the clearest proof point (IMO) of how the stock market can't be used as a proxy for the economy.
5) Health care affordability. This one may seem odd as an economic indicator. What I'm trying to capture here is the risk of people falling down the economic ladder. Persistently high unemployment is definitely one way people lose ground, economically. But so is not being able to afford healthcare. It's a sadly peculiar thing in the US today that most personal bankruptcies are related to medical bills. For a wide swath of the population from the lower end up into the middle class, people basically go broke when they suffer a serious health issue. Heck, even a minor health issue would put 40% of the people in this country into debt; see the $400 challenge.
The point of the phrase is to rebut the common association people have been making that stock market indices measure "the economy"; that when the market averages are at highs "the economy" is doing well, too. As I explained in my company-wide Slack comment, the stock market is more a reflection of how the wealthiest 10% of the population- and especially the top 1%- are doing than anything else.
Why is the market only a measure of the rich? For one, approximately half of all Americans don't even own stock, either directly or through their claims in a pension plan that holds stocks. Two, almost 85% of stock wealth is held by the top 10%. And three, the top 1% own half the total market.
So, if the stock market is not an adequate measure of the broader economy, what is? I propose it's a set of 5 things:
1) The stock market. Okay, let's start with this. Market indices do measure how the wealthier end of the population are doing. And they're tabulated on a daily basis, updated second by second, to several decimal places. So they make compelling daily news even if they're unrepresentative of the country as a whole.
2) Median income. This measures how the broad middle class are doing. Note the average to use is the median, not the mean. The mean is skewed upward by the sky-high wealth of the top 1%. Update: I wrote a separate blog entry about Mean vs. Median as it keeps coming up in how news stories are misreported and/or misunderstood.
3) The poverty rate. We've got to measure the poorest end of the economic spectrum, too.
4) Unemployment and under-employment. The ability of workers in the economy to find suitable work drives both overall economic health and individuals' economic well-being. This one ought to be obvious. And it's also part of the crazy situation that spurred me to write this article. The stock market has recovered nicely from its losses a few months ago, but the unemployment rate is still high and trending worse. For 10 years these two figures (market average and employment rate) have mirrored each other, moving in tandem in opposite directions. Now they're completely off the rails relative to each other. This is the clearest proof point (IMO) of how the stock market can't be used as a proxy for the economy.
5) Health care affordability. This one may seem odd as an economic indicator. What I'm trying to capture here is the risk of people falling down the economic ladder. Persistently high unemployment is definitely one way people lose ground, economically. But so is not being able to afford healthcare. It's a sadly peculiar thing in the US today that most personal bankruptcies are related to medical bills. For a wide swath of the population from the lower end up into the middle class, people basically go broke when they suffer a serious health issue. Heck, even a minor health issue would put 40% of the people in this country into debt; see the $400 challenge.