Why Are Global Stocks Surging While Underlying Economies Are Languishing?

The divergence and disconnect between Wall Street and Main Street have likely never been more pronounced than this year. The stock market has soared to record new heights while the COVID-19 pandemic has shuttered thousands of businesses and put millions of Americans out of work.

The S&P 500 index has surged 51.5% since March lows and recently scored an all-time high close. The tech-heavy Nasdaq has done even better, skyrocketing 64.1% from March lows, as mega-cap names like Apple (AAPL) and Amazon (AMZN) have flourished during the pandemic. The bourses have also been boosted by massive stimulus programs from the federal government.

Stocks have also benefitted tremendously from low short-term interest rates – with Treasuries and other bonds paying little in interest, investors seek higher returns in equities, gold and other riskier assets.

But for ordinary Americans, the picture is starkly different.

The U.S. gross domestic product plunged an unprecedented 32.9% in the second quarter, while the unemployment rate for June tallied 11.1% (7.4% higher than in June 2019). Millions of Americans who have been kept afloat by state and government financial assistance have seen some of those programs expire, thereby placing them at risk of prolonged joblessness, eviction and homelessness.

“Main Street is struggling,” Nouriel Roubini, chief executive of Roubini Macro Associates told Bloomberg.

Roubini, well known as “Dr. Doom” for his pessimism and bearishness, warned that another wave of COVID-19 outbreaks will slow down the recovery in the developed nations.

"Wall Street and Main Street certainly feel at odds right now -- there’s nothing typical about the S&P 500 hitting a record high while millions of Americans are filing unemployment each week,” Arielle O'Shea, investing and retirement specialist at NerdWallet, a personal finance company, told International Business Times

“But the stock market looks to the future and has already priced in much of our current economic reality. The market is looking out a year or two from now when a vaccine may be available and social distancing measures may be a thing of the past. Investors want to be in the market when a vaccine becomes a reality because it’s likely to cause the market to surge even higher.”

Jay Ritter, eminent scholar in the Department of Finance at the University of Florida, said the U.S. stock market underweights certain parts of the economy that are suffering the most.

“Many small businesses, such as family-owned bars and restaurants, plumbing firms, landscaping businesses, etc., have seen a collapse in business, but they are not represented in the stock market,” he told International Business Times.

Part of this disconnect has to do with the fact that the percentage of Americans owning stocks has been gradually slipping.

According to a Gallup poll taken in April, 55% of Americans reported having money invested in the stock market -- either in individual stocks, mutual funds, 401(k)s or IRAs – down from 62% just prior to the Great Recession.

Moreover, among Americans who do invest in equities, such ownership is highly concentrated among the wealthy – that is, those who can better withstand an economic downturn.

Edward Wolff, professor of economics at New York University, identified three main reasons for the disconnect between Wall Street and Main Street.

“First, 84% of stock is owned by the 10% richest households,” he told International Business Times. “So even though average incomes have likely gone down over the last few months, the income of the rich has likely gone up, fueling an increased demand for stocks.”

Second, Wolff noted, stock prices are based on future expected profits.

“So even if the overall economy is in the doldrums now, investors are expecting it to get better in the next few years and therefore future profits to rise,” he added. “Third, stocks represent a small sliver of American business. Indeed, the S&P 500 represents an even smaller sliver and is, in addition, heavily weighted by tech stocks. So even if businesses as a whole are doing badly now, the businesses represented by the [S&P 500] index -- particularly the tech companies -- are likely to be doing well.”

Rene M. Stulz, the chair of banking and monetary economics at Ohio State University, pointed out how companies on the stock market represent a small portion of the economy.

“Stock market firms employ about 30% of people working in the private sector, so the typical person does not work for a company listed on the stock market,” he told IBT.

But even the stock market has its winners and losers – further stratifying the economic landscape. While big tech companies have led the stock market surge this year, banks and energy issues have languished.

In addition, the huge companies that dominate the U.S. stock indexes – with their massive cash balances, diversified business lines, access to capital markets and extensive operations overseas – have virtually nothing in common with small businesses on Main Street which are ailing and increasingly dependent upon government stimulus to survive.

Joachim Klement, a market analyst at Liberum Capital in London, told International Business Times that the sector composition of the stock market deviates significantly from the sector composition of the real economy.

“For example, tech companies make up a much larger share of the U.S. stock market than [it does of] the U.S. economy. Hence, even if the stock market behaves rational it will deviate significantly from the overall economy. In this pandemic companies that rely less on labor (e.g. tech and telecom) than others have done significantly better. So the differences between Wall Street and Main Street have been particularly stark this year.”

John Traynor. chief investment officer at People’s United Advisors, said the fact that the stock market is moving up, while the headlines are poor, is “normal.”

“But we’re concerned that the market is discounting a classic booming economy coming out of a recession next year and we just don’t see that happening,” he told IBT. “Right now it seems like we’re discounting nirvana rather than discounting a normal market and that is our biggest concern.”

In Europe, the situation is somewhat similar. While these countries have been similarly battered by the COVID-19 pandemic, rising joblessness and national lockdowns, their major stock indexes have almost kept pace with the high-flying U.S. bourses. As in the U.S., European stocks have been buoyed by massive government stimulus.

Since their March lows, Germany’s DAX has surged 45.9%, France’s CAC-40 has jumped 30.2% and Britain’s FTSE has gained 20.1%.

Meanwhile, the unemployment rate in the EU rose to 7.1% in June (up from 6.6% a year ago). The euro zone GDP plunged by 12.1% in the second quarter, while German GDP fell 10.1%; Italy tumbled 12.4%; France dropped 13.8%; Spain plummeted by 18.5%.

While the U.K reported a relatively low jobless rate of 3.9% in June, some analysts say this figure is misleading. For one thing, some 12 million Britons are receiving wages through a government subsidy/furlough program – these people are not working, but are not considered “unemployed.” (Those government schemes expire in October).

“The [U.K.] unemployment rate may be stable, but almost three-quarters of a million fewer people are on payroll [compared with March], the number claiming unemployment benefits has more than doubled and economic inactivity is rising – plus millions remain on furlough,” said Charlotte Pickles of Reform, a London-based thinktank.

But Roubini noted that Western Europe is actually handling the current crisis better than the U.S.

“The European system of greater social cohesion gives you better economic outcomes than the one of the United States that is just ‘Wild West’ capitalism,” he said. “That’s why the unemployment rate barely went up in Germany or even in Italy, while in the U.S. we’ve had [a] double-digit unemployment rate.”

Similarly, in Japan, GDP plunged by a record annualized figure of 27.8% in the second quarter as private consumption and exports were decimated.

Nonetheless, the Nikkei-225 stock index has climbed 38.5% from March lows.

John Cunnison, chief investment officer of Baker Boyer Bank in Walla Walla, Wash, concluded with a hopeful tone.

“This recession was caused by a virus, not any kind of structural economic imbalance,” he told IBT. “The cure, therefore, does not necessarily involve the kind of longer-term painful economic restructuring that often follows a recession. The vaccine for this recession is literally a vaccine. Bottom line: investors can see the light at the end of the tunnel. The same was not true of 2008 and some recessions in the past.”