Despite a Struggling Economy, Stock Market Hits Record Highs

The S&P 500 and the NASDAQ Composite hit record highs on Aug. 18.

This was a new benchmark for the S&P 500 since coronavirus hit. The NASDAQ set its record in June and has climbed higher ever since.

On Aug. 19, the Dow Jones Industrial Average (DJIA) hovered around six percent below its peak in June, dragged down by companies like BoeingExxon, and Raytheon.

How are stocks doing this well when unemployment has spiked, and GDP has fallen at record rates? Many critics have expressed dismay that Wall Street seems so disconnected from the reality of most people.

American billionaires have collectively added more than $600 billion to their net worth throughout the pandemic, while the vast majority of low-income people do not own stocks. 22 percent of those making $40,000 annually or less own stocks, while 84 percent with an income of $100,000 or higher have stocks.

According to the Washington Post, the discrepancy between the market’s performance and the economy has a straightforward explanation.

“The idea that the stock market is the economy and the economy is the stock market — the correlation between the two is tenuous, at best,” said Barry Ritholtz, CIO of Ritholtz Wealth Management, “The index isn’t the real world.”

Small businesses are among the hardest hit from the crisis. They account for almost half of private-sector employment yet are not publicly traded on these exchanges.

The stock market has more or less accurately tracked how larger companies are doing.

Companies that have poor prospects, like airlines, hotels, and energy companies, have been performing poorly in the stock market, while tech companies (which make up a large part of the NASDAQ) have surged.

The New York Times attributed the increase in stock prices to government stimulus efforts and the Federal Reserve purchasing trillions in assetsincreasing the money supply by 22 percent, and making billions available in loans.

Stronger than expected earnings for big tech and some retailers that successfully pivoted to e-commerce (WalmartHome Depot, and Target) also helped.

Government contracts with healthcare companies producing vaccines have also played a part.

VBI Vaccines has never turned a profit since it has been public on NASDAQ. However, its shares increased by 450 percent since March after receiving funding from the Canadian government for a COVID-19 vaccine. Although it is far behind its competitors in developing a COVID-19 vaccine, VBI is seeking approval for several others, including SARS, MERS, hepatitis B, and glioblastoma.

Many are worried that the booming stock prices are inflated by the massive increase in the money supply and more of an illusion built on hopes rather than revenue.

In a statement in June, the International Monetary Fund (IMF) said, “This disconnect between markets and the real economy raises the risk of another correction in risk asset prices…According to IMF staff models, the difference between market prices and fundamental valuations is near historic highs.”

Peter Boockvar, the chief investment adviser at the Bleakley Advisory Group, told the Washington Post that overall stock price-to-sales ratios are higher than before the dot-com burst of 2000-2001.

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