The Nasdaq and S&P500 made new all-time highs last week. That leads many people to believe that the economy must be doing well. But the very thing that is helping Wall Street boom is damaging the real economy. When you think about it, economies have been shut down for weeks and governments continue to impose many restrictions to this day. Unemployment has skyrocketed and we remain in the midst of a deep recession… yet there is a booming stock market?
A V-shape recovery in the Stock Market doesn’t mean a V-shape recovery in the real economy and there are still so many signs that the economy is going to continue to struggle long-term. Mortgage delinquencies are on the rise, businesses are shutting down, bankruptcies are at a 10-year high, tenants owe thousands in back rent and more defaults are on the horizon.
When the stimulus is to print money at artificially low interest rates, it fuels asset bubbles with inflation. This still doesn’t do anything for the real economy. However, It is a great boasting card for politicians - as it creates the illusion that the economy is good. There is also a trickle-down wealth effect. By artificially raising the prices of stocks, it makes people wealthier – at least on paper. This paper then collateralises all sorts of loans and the additional debt generates spending that pumps up GDP. Of course, this is temporary, in a way it is just pulling consumption forward at the expense of having much less in the future.
Stock markets do not reflect the economy as a whole rather just the earnings of the companies in the stock market. The vast majority of businesses are not publicly listed and are privately held. The companies that are doing well right now are benefiting from the overall weakness of the economy. Netflix are doing well because cinemas are not allowed to open. Amazon is doing well because no one wants to go out. Meanwhile, small to medium businesses are getting decimated. Since these big companies have less competition from smaller companies, that also benefits the stock market.
These big companies can also make the most out of the artificially low interest markets by tapping into bond markets. Small to Medium businesses have no ability to borrow because they don’t have the creditworthiness or connections.
In reality, there is a huge divergence between Stock Markets and the real economy. The weakness in the economy is what’s benefitting the stock market. The weaker the economy gets the better it will be for the stock markets because Central Banks will continue to print more money.