On Wednesday, February 19th, 2020, the S&P 500 closed at a record high and the economy looked great. Unemployment was at a fifty-year low and annualized economic growth since 2017 was holding steady at 2.4%. According to Gallup Poll, 63% of Americans rated the economy as “good” or better, with 24% rating it as “excellent”. The stock market was continuing its longest bull run in history with no end in sight.
On December 31st of 2019, the Wuhan Municipal Health Commission in China first reported a cluster of pneumonia cases in the Hubei province. As the public now knows, the virus was soon identified to be a highly-contagious coronavirus and quickly spread across the globe. The subsequent shutdown of the global trade and productivity sent the economy and the stock markets diving. The S&P reached a low of 2237 points on March 23rd, an 1100 point drop since February, and U.S. unemployment reached almost 16%. However, as the recovery of the national economy and dropping unemployment rates start to slow down, many are left wondering how the markets have rapidly recovered to pre-COVID numbers.
Those who are not that knowledgeable about economics have been quick to attribute this discrepancy to the greed of the ultra-rich and accuse them of taking advantage of the working class. For this, there is something to be said. According to Bloomberg, billionaires have added upwards of 637 billion dollars to their net worth since the beginning of the pandemic. This massive gain of wealth contrasts with the rest of America, which is dealing with the highest unemployment rates since The Great Depression with millions of families facing poverty.
While this vast transfer of assets and increased inequality during the pandemic is regrettable, it is due to many structural issues rather than individual decisions. Those with vast quantities of wealth are able to weather catastrophic events. It also happens to be that the majority of those in the billionaire class happen to earn their wealth from businesses and services that are specifically useful during a pandemic. According to Forbes, 60.75% of billionaires in the United States make their money from one of these 5 sectors: Technology, Food & Beverage, Media & Entertainment, Finance & Investment, and Manufacturing, all industries in which large cap companies have generally thrived throughout the pandemic. Billionaires earned so much money because of a huge surge in demand for their services. For example, Jeff Bezos had a vast increase in wealth because almost everyone in the country would rather order what they need through Amazon than travel to a store to buy it (and don’t get me started on the boom of grocery store sales for places such as Whole Foods, also owned by Amazon.)
That still does not answer the question of why the economy and the stock market, which typically are seen as correlated, have moved in opposite directions. The truth is much too complicated to simplify into one article, but one basic reason is that the stock market is simply not representative of the economy. According to the United States Bureau of Economic Analysis, the U.S. economy has shifted heavily towards the service industry over the past century. In 2018, the service industry accounted for over 68% of total GDP. The stock market, however, is currently propped up by other sectors such as informational technology that is currently worth well over 11 trillion dollars. As permanent layoffs continue to climb for jobs such as restaurant workers and hotel employees, the economic and unemployment recovery will continue to decelerate, and will likely take years to fully recover. The stock market, on the other hand, is fundamentally based on future expected-value. As technology and other sectors with relatively few employees continue to have important roles in pandemic life, those stock prices and company valuations will keep rising (with reason) and the disparity will continue to grow.
There are other factors also contributing to the rising market and specifically market volatility. The federal reserve has vowed to keep interest rates low and allow inflation to rise. There have been vast increases in small-volume traders from brokers such as Robinhood, among other things. There is also an increasing worry that the market is in a bubble (hyper-inflated), and a post-pandemic crash is due to come. However, unless or until that happens, the stock market will continue to move further and further away from the true state of the economy.