Facebook
X
LinkdIn
Copy Link
COVID-19 is still raging, with little sign of coming under control. The economy is already a tenth smaller than it was at the start of the year. Joblessness is soaring. And the budget deficit? Don’t even ask. But, hey, perhaps we shouldn’t worry about any of that. As the President of the United States keeps pointing out, the stock market is doing great, and, in his opinion, anyway, that means America, to borrow the kind of slogan that fits neatly onto a baseball cap, is great again as well. There is a problem, however, with Trump’s breezy 21-character analysis. It is not really true. The main equity indices reflect many different things, and the health of the economy is not always one of them.
Big Stock Market Numbers!
— Donald J. Trump (@realDonaldTrump) August 11, 2020
‘Big Stock Market Numbers!’ tweeted the President last week. True, it is not hard to see why the President is once again boasting about the strength of the Dow and Nasdaq. Stocks have been hitting record highs, putting money in the pockets of investors, and restoring confidence among businesses. Perhaps most importantly for Trump, when Wall Street is up in the three months before a presidential election, the incumbent party almost always wins (that has been true in 20 of the last 23 elections, with the last exception Reagan’s victory over Jimmy Carter in 1980). If he can just keep this rally going for another few weeks, then four more years in the White House will be virtually guaranteed.
The problem for Trump is this: a strong stock market and a strong economy are not necessarily the same thing. A rising market can reflect rising confidence in economic growth, which means in turn that companies will be making more money they can then distribute with their shareholders. It can however also reflect many other things: an avalanche of printed money from the Federal Reserve; a wave of government spending; a complete absence of anywhere else to park some cash; or, come to think of it, a few too many tequila shots at some of the bigger hedge funds. There are lots of times when the market has predicted a boom that hasn’t materialized.
[special_offer]
In fact, that may be even more true of this bull run than normal. The strength of the market, in reality, simply reflects the strength of a handful of huge tech companies. Strip out Amazon, Apple, Alphabet and, increasingly, Tesla as well, and the index isn’t doing very well at all. The truth is, lockdown has hit both the economy of the United States, and its main trading partners, very hard. Whole industries such as airlines have been destroyed, and others are seeing catastrophic falls in the levels of trade. Jobs are starting to be lost, and that will get far, far worse over the next few months. The result? People are going to be poorer. The stock market, for all sorts of reasons of its own, has decided to ignore that for the moment. But everyone else is going to notice — and no amount of boasting about the Dow on Twitter is going to change that harsh reality
