I have long been saying that the US stock market seems to have almost no connection to the general state of the economy but instead seems mainly related to how the very wealthy are doing and this week brought more evidence of that. In March, the market plunged as the country shut down, which made sense. But since then the market has risen again, thanks to the actions of the government and the Federal Reserve to prop it up, even though things are very dire for most people who are suffering from loss of jobs, income, health insurance, and facing evictions.
On Tuesday, the market reached a new record high, breaking the previous record set in February just before the pandemic hit. The new highs were propelled by just six major tech companies: Amazon, Netflix, Microsoft, Apple, Facebook, and Google.
The Economic Policy Institute has issued a new report that provides some very telling information in two graphs.
One graph shows how closely the stock market tracks the average CEO compensation
The other graph shows that the ratio of the average CEO compensation to average worker compensation also tracks the market.
It is truly obscene how CEOs have cranked up their compensation from just 20 times that of the average worker in the 1970s to over 300 times now.
I know that correlation is not causation but these graphs add more evidence to the thesis that the stock market is more a reflection of the state of finances of CEOs and the wealthy than of the conditions of the general economy.
Or, since many CEOs take some/most of their compensation in stock, the graph is effectively a tautology…
That’s correct. And, it is somewhat new. My father has had to follow the market for 60 years, and he told me he’s never seen it like this.
Apparently it used to have some connection to how the economy was doing. No longer: it now reflects the wishful thinking of the rich, who stand to make a lot of money from it. If everyone gets together and thinks hard enough that the market should rise, it does, regardless of how the national economy is.
I couldn’t understand the stock market and how it worked, at all, until I realized that the problem was that there is nothing to understand anymore. It will go up because those who want it to are so powerful now, and have so much to gain, that their wishes will manifest. If the market reflects the horrible state of the economy, the 1% will lose billions of dollars, and *that* can’t be allowed!
@garnetstar: the market is responding to “the rich get richer” which is what is happening. And since the government is protecting it, that will keep happening. Hence the truly rosy outlook. The market never has reflected the other 99% because they don’t affect the economy.
It also help the stock market that interest rates are so horribly low.