UNIDENTIFIED PERSON, BYLINE: NPR.
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STACEY VANEK SMITH, HOST:
Hey, everyone. Cardiff and Stacey here. This is THE INDICATOR FROM PLANET MONEY. There was a moment about a year and a half ago when there was this big disconnect between the stock market and the economy. At that moment, the economy was doing fine. It was doing really well. But the stock market was tanking.
CARDIFF GARCIA, HOST:
And to explain that disconnect, we called our old friend Josh Brown. He is the CEO of Ritholtz Wealth Management, where he advises clients on how to invest their money. And his answer back then was so good that Stacey and I have been thinking about it ever since.
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JOSH BROWN: Now I'm going to give you my favorite analogy. So a woman is walking through Central Park, and she's got a dog. What's a very active kind of dog?
VANEK SMITH: Oh, like a Jack Russell terrier or something like that.
BROWN: Fine. Jack Russell terrier is great. If you just looked at her, what is she doing? She's taking normal steps. She's going in a straight line. She's, you know, walking upright at a moderate pace, nothing terribly exciting. Then let your eyes pan down a little bit. Look at the dog. The dog is going crazy. It's chasing birds. It's digging up clumps of mud. It's running at trees. It's peeing all over the place. The dog is the stock market. The woman is the economy.
GARCIA: That's genius.
VANEK SMITH: Josh Brown.
GARCIA: Yeah, Josh's point is that the stock market and the economy usually end up in the same place just like the lady and her crazy dog, but that there are times when they do not act or look the same at all. And today, there is a different kind of disconnect between the stock market and the economy.
VANEK SMITH: Yeah. I mean, when the coronavirus pandemic started forcing the U.S. economy to shut down in late February, the stock market tanked for the next month. By late March, it was down 34%. But then, even though the economy has kept getting worse and worse, the U.S. stock market has started to recover. It rebounded in a big way so that now it is only down 13% from where it was in February before the recession started.
GARCIA: And meanwhile, millions of workers keep losing their jobs each week. And a lot of businesses have closed, some of them for good. So after the break, we speak with Josh again, and we ask him, why is the stock market doing fine while the economy is in such terrible shape?
VANEK SMITH: Josh Brown is the CEO of Ritholtz Wealth Management, a company that advises people on how to invest their money.
GARCIA: Josh, right now, where is this analogy? Is, like, the dog-walking lady in a ditch somewhere and the dog is just off the leash? I mean, what is happening?
VANEK SMITH: The dog is having tea at the plaza.
BROWN: So this is a really interesting example of where the stock market did beat the real economy to what was happening, and it reprised (ph) really quickly. And then all of a sudden, it became a battle of the composition of the stock markets.
GARCIA: The composition of the stock market. What Josh is saying here is that at first, the whole stock market collapsed when coronavirus started hurting the U.S. economy, but then some stocks of companies started recovering even as others continued to struggle.
BROWN: Because by a fluke of history, it just so happens that the companies that are the best positioned for the environment we find ourselves in and what we will find ourselves in over the next six months to a year, the companies that are best positioned happen to already be the largest weighted components of the indices.
VANEK SMITH: Some of the stocks that are doing well right now - companies like Facebook, Amazon, Microsoft, Apple and Alphabet, a.k.a. Google - are also some of the most valuable companies in the country. In fact, just those five companies make up about 20% of the entire S&P 500 index, which is a stock index of the 500 biggest U.S. companies. And so when those five stocks do well, they can help pull up the whole index.
GARCIA: And it's no surprise that those stocks are doing well. They make products that people can still use now while staying at home. And the same goes for the stocks of other tech and communications companies like, say, Zoom.
VANEK SMITH: But aside from Amazon, which has almost a million workers, a lot of these companies don't actually employ that many people. Microsoft only has 144,000 workers. Facebook has just 48,000 workers. And this can partly explain why tens of millions of people can lose their jobs while the stock market keeps going up.
BROWN: So it is a tough situation where you are seeing a lot of the spoils. And I hate to use that term, but the spoils of this crisis, you are seeing a lot of that accrue to corporations that don't necessarily have workforces of millions and millions of people but have highly specialized employment in very specific pockets of the country, like Seattle, Northern California.
GARCIA: Josh says, quite simply, not all companies are the same. Some big ones are doing fine, pulling up the stock market. Others are struggling, possibly going bankrupt, laying off workers.
BROWN: People forget it's not an index where one guy scratches his chin and says, well, the economy's really bad. So let me mark it down 400 points today. No. It's made up of individual companies. It's basically a collection of securities where people are betting on the cash flows of individual companies. Then it's not so weird for it to look better than the real economy.
VANEK SMITH: Is this like - one of the things that I have heard from people which has made me feel a little better, which maybe is incorrect, is that it's sort of like this beacon of hope. Like, actually, like, the stock markets, you know, it's sort of predictive. So actually, the stock market's predicting we're going to get out of this. Like, things are going to be OK. Is that maybe not...
BROWN: Well, so OK, I like that. I hope that's true. Here's the other way to look at it. It's dystopia, and we are further separating the people who are in the investor class from everyone else.
VANEK SMITH: So here's what Josh means about the separation between the investor class and everybody else. So a bad economy is bad for almost everybody, but a healthy stock market is only good for the share of the population that actually owns stock. And that is not everybody.
GARCIA: Yeah, the richest 40% of households in the U.S. own 98% of the stock market, meaning that for most of the country - 60% of all households in the country - there is only 2% of the stock market left for them to split.
VANEK SMITH: So if a rally in the stock market is not predicting that the economy will get healthier soon, then a higher stock market just means that the investor class, the people who own stocks, will benefit while everyone else is just left to keep struggling with layoffs and pay cuts and a bad economy. And that is why Josh calls it dystopian.
BROWN: The dystopian way of looking at the stock market versus the economy is you've turned on CNN, There's a line of cars waiting, people that are literally emptying food banks trying to get as much food as they can because they don't know when their next paycheck is coming, right? So there's that America. And then there's the other America where if you had gone on vacation for three months and came back, your stock portfolio is where it was. You wouldn't even know there was a pandemic.
VANEK SMITH: So is the stock market predicting an economic recovery that would benefit everyone? Or is it just that one part of corporate America happens to be doing well, a part which mainly benefits people who can afford to invest in the markets?
GARCIA: On those questions, Josh does not make any predictions about either the economy or the stock market. There are just too many unknowns right now - for instance, when will the virus itself be stopped? How will policymakers, like the Federal Reserve and Congress, continue responding to the recession? And what will be the longer-lasting effects of this terrible and strange moment?
BROWN: The worse outcome is that there are people who lose their jobs right now that never get those jobs back and either can remake themselves doing something else or can't. And the long-term ramifications of mass shock unemployment, we have no idea what those will be. They could be benign and go away, or they could be catastrophic in terms of consumer aggregate demand and in terms of societal change and who needs to be taken care of forever because there just isn't a place for them anymore. So I think it would be a mistake - to go back to the dog and the woman analogy, I think it would be a mistake to say that the dog is right necessarily just because of where the dog has arrived at. I think it would be - it would be premature.
GARCIA: The S&P 500 was roughly flat today. And for the past two months, since March 20, it has gone up 28%. During that time, more than 35 million people have filed for unemployment after losing their jobs.
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GARCIA: This episode of THE INDICATOR was produced by Darius Rafieyan and fact-checked by Brittany Cronin. THE INDICATOR is edited by Paddy Hirsch, and it is a production of NPR.
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