(The opinions expressed here are those of the author, a columnist for Reuters)
By James Saft
Feb 20 (Reuters) - 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 today.
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 via deregulation.
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 businesses.
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 about stocks. (Editing by James Dalgleish) )