President Trump’s Focus on the Stock Market is an Inappropriate Measure of the Health of the U.S. Economy

Throughout his time in office, President Trump has constantly correlated the performance of the stock market to the performance of the overall economy. According to him, “Stocks are owned by everybody” and that the positive stock market performance is “good for everybody [as even] people that aren’t rich own stock and have 401(k)s”.

Even if he was correct, the stock market is not an accurate representation of the holistic recovery of the United States from the pandemic caused by COVID-19.

Trump’s use of the stock market as a measure of the entire economy is inappropriate and misleading. (Source: realDonaldTrump twitter)

In June, Trump emphasized the rebound of the economy from the pandemic, saying, “This is better than a V. This is a rocket ship. This is far better than a V”. However, many point out that the shape of the recovery is more of a K — where the recovery has benefited the rich greater than the poor, widening the gap between them. This is a view widely supported by his Democratic counterpart, Joe Biden. “If you’re on the top, you’re going to do very well,” Biden said at his town hall. “And if you’re on the bottom or if you’re in the middle or the bottom, your income is coming down. You’re not getting a raise”.

A K-shaped recovery widens the gap between the rich and the poor.

He could not be more correct. The truth is, millions of Americans cannot feel the boom of the stock market and reap its rewards.

Just over half of American families have some level of investment in the market. This is usually in the form of 401ks and other retirement accounts. However, only 14% of households directly invested in individual stocks in the market.

As a result, using the stock market to represent the financial performance of the middle class is extremely erroneous and misleading.

Trump argues that the sharp rebound in the stock market doesn’t only help “big people”.

“It affects everybody, it affects a person that owns $10,000 worth of stock in IBM or whatever company it may be” Trump said at his town hall.

Yet, rich Americans have far more investments in the market. This means that when the prices of stocks go up or down, they impact these people more disproportionately. Consequently, when the stock market booms, they reap greater rewards.

In 2007, stock ownership peaked with around 65% of Americans owning stocks. However, as a result of the Financial Crisis in 2008 and rising unemployment levels, stock ownership has been on the decline since as many Americans began to find it difficult to buy-in.

In the first quarter of 2020, the wealthiest 10% of American households owned 87% of all stocks and mutual funds — up from 82% in 2009 when the last bull market (a market in which share prices are rising, encouraging buying) began. Compared to their wealthy counterparts, the middle class; defined as households in the 20–80% range of wealth, owned just 6.6% of stocks, illustrating the fact that most Americans do not have a stake in the stock market.

S&P 500

The Standard & Poor (S&P) 500 is a stock market index that measures the stock performance of the 500 largest U.S. publicly traded companies. Essentially, it aims to provide a general overview as to how the stock market is doing. Though it has returned over 50% since President Trump was elected, it is not a representation of the entire economy. It represents the fortunes of the biggest companies — those with the resources necessary to get through a crisis.

Figure 2 The performance of the S&P 500 since President Trump was elected (Source: Markets Insider)

Consequently, it cannot be used as a measure for Main Street (often cited as the opposite of Wall Street, describing the individual small investor in contrast to the professional securities trader). As a result of the pandemic, small businesses have struggled, losing money, resulting in bankruptcy. Subsequently, the market share of S&P 500 companies increases making it seem like the entire economy is doing well. This misconception could not be farther from the truth. The S&P 500 can be disconnected from the entire economy and is proven through the fact that the S&P 500 is sitting near record highs despite high unemployment and increasing bankruptcy filings.

Figure 3 U.S. unemployment rate over the past 12 years

Consumer Confidence

The disconnect between the S&P 500 and the entire economy is greatly affected by actions from the Federal Reserve. As a result of dropping the interest rates to zero and promising to keep them there for a long time to come, they have encouraged investors to place their bets on stocks.

There are benefits to the recovery on Wall Street. The rise in the S&P 500 evokes confidence amongst C-suite executives encouraging them to hire more people and spend more money on research and development, both of which boost the real economy.

Similarly, consumers — especially those that own significant amount of stock in the market, take their cues from the market. The record prices of stocks incentivize consumers to sell and use the extra cash to buy new goods/services — increasing the economic benefit of doing so and boosting the economy in the process.

Black Households and Racial Minorities

Individual stocks along with the stock market as a whole cannot be used to gauge the financial health of average Americans — especially Black households and racial minorities.

Black households own 1.6% of stocks and mutual funds — a trend that is also seen in Hispanic families. This is a staggering amount compared to White households who control 92% of stocks and mutual funds. The typical Black family has “less than $13 in wealth for every $100 held by the typical white family”.

Many suggest this variance stems from a history rooted with discrimination and fear. As said by Malcolm Ethridge, a financial advisor in the Washington area, “Black Americans tend not to trust things that are not tangible because of our history in this country and things being taken away”.

“It gets passed on to you from generation to generation: to only trust and believe in things you can actually touch”. “A house, I can put my hands on that and believe in that, whereas a stock is just whatever someone else tells me it’s worth, and I just have to take your word for it”.

“We didn’t have a grandfather or aunt or uncle or mom and dad educating us on the markets because they didn’t benefit from it because of historical discrimination in this country”. — John W. Rogers Jr. founder and co-CEO of Ariel Investments

Others blame the deep divide across the education spectrum. Americans with no college education own just 5.4% of stocks and mutual funds, down from 17% in 1989.

What Next?

It is evident that the boom in the stock market has amplified the inequality divide in America. It has widened the gap between top groups and those in the middle, increasing wealth inequality in the process and as a result, fueled political unrest.

Subsequently, the next president of the United States must ensure that they do not misuse the stock market to illustrate the performance of the entire economy to the degree that President Trump has.

Works Cited

Choe, Stan. “Stocks Are Soaring, and Most Black People Are Missing Out.” ABC News, ABC News Network, 12 Oct. 2020, 20:01, abcnews.go.com/Business/wireStory/stocks-soaring-black-people-missing-73567655.

Egan, Matt. Analysis: The Simple Thing Trump Doesn’t Get about the Stock Market. 16 Sept. 2020, www.cnn.com/2020/09/16/investing/stock-market-trump-economy/index.html.

Fitzgerald, Maggie. “Trump Stock Market Rally Is Far Outpacing Past US Presidents.” CNBC, CNBC, 26 Dec. 2019, www.cnbc.com/2019/12/26/trumps-stock-market-rally-is-far-outpacing-past-us-presidents.html.

Lacurci, Greg. “Trump Touts V-Shaped Economic Recovery, While Biden Sees It K-Shaped.” CNBC, CNBC, 16 Oct. 2020, www.cnbc.com/2020/10/16/trump-touts-v-shaped-economic-recovery-while-biden-sees-it-k-shaped.html.

Lambert, Lance. “In Final Jobs Report before the Election, U.S. Adds a Disappointing 661,000 Jobs amid Signs the Recovery Is Sputtering.” Fortune, Fortune, 2 Oct. 2020, fortune.com/2020/10/02/us-unemployment-jobs-report-september-2020-economy-coronavirus-covid-19/.

Yousuf, Hibah. “Stocks at Record Highs, but Only Half of All Americans Invested.” CNNMoney, Cable News Network, money.cnn.com/2013/05/09/investing/american-stock-ownership.