(The opinions expressed here are those of the author, a
columnist for Reuters)
By James Saft
Feb 20 Here is a complete list of all the things
we can definitely infer from higher stock market prices:
1 - People who own stocks would have more cash if they sold
That’s it. Almost every other claim citing rising stock
prices as evidence of the health of the nation, economy or
people is a partisan confection of conflation and misdirection.
The rest are unintentionally wrong.
It is no more true to say today that the new heights of the
stock market are a verdict in support of Donald Trump, as he
argues, than it was several months ago to imply they confirm the
policies of Barack Obama, as he did in his exit apologias.
Let me break the news to you. Stocks are going up now under
Trump because he proposes a transfer of wealth from the public
purse, via tax cuts and deficit spending, to corporate balance
sheets. Oh yes, and also a transfer from consumers to companies
Stocks went up under Obama in part because he made bank
creditors whole, “foamed the runways” for banks to recover their
private speculations, and was aided by exceptionally helpful
Federal Reserve policy.
We may debate the wisdom of these various policies but their
point should not be to drive the stock market higher and that is
not the basis on which they, or their authors, should be judged.
What’s even more confounding is that when either Trump or,
back in the day, Obama, is criticized for invoking the support
of the stock market the basis was not that this was the wrong
measure of health and success, but that it is a dangerous tack
to take because stocks may go down as well as up.
That’s simply not the point. That the U.S. becomes an
economy in which everyone magically becomes wealthy via the
stock market is a bad idea analogous to the British fantasy of a
decade ago that everyone will wax prosperous by living in
houses, or renting them to one another.
The cult of equity in the United States as a national
barometer of wellbeing took hold about 1980, shortly after
legislation was passed making possible tax-advantaged retirement
savings in accounts which usually hold stocks. That did much to
democratize the benefits of higher equity prices, but a look at
broader indicators show that middle-income Americans have seen
their share diminish on a variety of measures since then.
Let’s be fair: studies have found a weak, if statistically
meaningful relationship between current stock market movements
and future economic growth, so we must not declare them
completely irrelevant. Remember too though that 'studies'
(carried out by me when my own were young) also find a strong
relationship between giving kids candy and having them fall
blessedly silent for a bit.
And just as giving kids candy makes them quiet but can
damage their health and impulse control so too can we say that
the things that make stocks go up aren’t everywhere and always
good for the health of the companies they represent, much less
the economy and the people living in it.
We need only look at the last several stock market booms to
see that they were not, as a rule, or ever, built on firm
foundations of broad-based economic health. The most recent, by
which I mean the rally which began at the lows in 2008 and
continues until today, is distinguished by the fact that it has
created jobs but not much by way of productivity gains or even
wage growth. It has been, in many ways, a rally based on
financial engineering, with companies borrowing cheaply to buy
back their own shares in preference to investing in their
The rally which preceded the great financial crisis was also
built on financial alchemy, though it was turning houses into
cash via leverage and the imprudent re-designation of high-risk
mortgages into very low-risk mortgage securities. As for the
dotcom rally which ended with a bust in 2000, that too was built
on unrealistic expectations, not about the transformative power
of technology, but that it would create new wealth without
destroying existing streams of income. Go to a mall and see the
empty storefronts if you want to understand this.
True, a sudden crash in stocks can cause a self-reinforcing
spiral downward in the economy, just as rising prices can fuel
growth, but both are temporary in nature.
The stock market isn’t a leading indicator of economic
health; it is at best a coincident indicator about optimism
(Editing by James Dalgleish)