The US stock market has indeed been on fire and a lot of people will tell you that means great things about the economy and, by implication, you.
That may not be entirely true. In some cases, it may not even be partially true. Let’s tackle some important concepts first.
You hear a lot about the Dow Jones Industrial Average (DJIA). It just passed 20,000. It went up a record 13 straight days (though not yesterday). Wealth spread to all.
Except, the DJIA you keep hearing about is all of 30 stocks. That’s right, just 30 companies. They are meant to represent the broader business market, but any one company can exert undue influence, even when weighted, when there are only 30 in the pool.
To illustrate that point, through last month, four stocks, Apple, IBM, Boeing and Visa, accounted for 98 percent of the record rise of the Dow this year. Four. 98%. Good news if you are looking to be hired by one of those four companies…not so exciting elsewhere.
But does that even mean those four companies are hiring? It’s important to distinguish between rising stock prices and rising employment.
The stock market is most affected by three things: Top line growth, bottom line growth and expectations. Consumers have a direct impact on all three, but not necessarily how you might think.
Top line growth is sales. Stock buyers love when a company shows increasing sales. Increasing sales come from consumers buying the products (or manufacturers buying the products to produce other stuff that consumers eventually buy). Consumers are good for stock prices on the top line.
Bottom line growth is profits. This is sales less all the expenses. Expenses like wages paid to employees. And health benefits. And advertising. Discounts eat into profits. Higher wages eat into profits. Lower prices eat into profits. Consumers/workers are not always good for stock prices on the bottom line (many companies get a stock price boost when they lay off workers).
Expectations work in two ways: what the company tells stock buyers they expect going forward and what stock buyers expect of the economy going forward. This gets a little more complex, but let’s examine it relatively simply.
When a company forecasts it will be growing top and bottom line, the stock jumps in value. Unless stock buyers think it should be growing more, but that’s more confusing than needed right now.
When the economy is expected to grow going forward, stock buyers push up the prices of stocks in anticipation of more sales and profits.
So, when the president says he’s going to reduce taxes for companies, throw a trillion dollars at infrastructure, $54 billion at defense and reduce consumers’ taxes, the stock market celebrates like it’s 1999…oops, bad reference, since that’s when the stock market began crashing from the last over-enthusiastic bubble.
So, assuming you took in all of that and are still here, what’s all that stock market euphoria mean for the average American?
Not quite as much as you might wish.
Sure, anyone with a 401(k) or IRA or some form of investments is doing well. For the future. But none of that means much for your rent, electricity, food and school expenses for today.
High stock market prices don’t create more jobs, it just makes investments more valuable. On paper, at least.
As I try to mention as often as I can to my 20-something nieces, it’s great to have money put away for the future earning 7% (the historical return on stocks for the last 60 years), but it’s much better to pay off your credit cards costing 10%, 15% or 20%. You may not get to your “future” if you can’t afford your present.
Then there is health care. Supposedly, getting rid of the Affordable Care Act (ACA) is going to reduce your costs and increase your flexibility. The reason your health care costs so much is that doctors and pharmaceutical costs are higher in America than most anywhere in the world. And that’s because insurers cover the charges. And that’s because insurers charge back consumers.
Want cheaper healthcare? Look into pricing. Want less regulation? Well, remember those three things stock buyers look at mentioned earlier? Year-to-date, the DJIA has gone up 5.3%; the S&P 500 (a broader index) has gone up 5.6%. Health care stocks have gone up 8.5%.
Cheaper health care doesn’t seem to match up with either higher sales or higher profits that stock buyers seem to be expecting for the health care companies.
Overall, the stock market has been flying because stock buyers hear and read about the new administration’s plans to lower corporate taxes (higher profits), increase infrastructure spending (higher sales) and improve overall growth to 4% (higher expectations).
But the tax reform is not going to happen until (by current statements) at the earliest August, which means no real impact until 2018. Growth has already been pedaled back from 4% to 3% (we’re currently at 2%, so it’s not quite the explosion of growth that was promised).
And spending a trillion on infrastructure? Let me show that to you: $1,000,000,000,000.
If taxes get lowered and spending goes up, what happens to the deficit (remember that? It was a “disaster” on the campaign trail at $19 trillion)?
All of these things will have to come due at some point. At that point, stock buyers start going south…fast. Stock markets don’t have to “crash” for them to go down a lot.
The average consumer’s situation may not change much when the market goes up, but you can bet you’re going to feel it when the market goes down…in interest rates, in difficulty getting loans and in layoffs.
Using the stock market as a measure of whether the country is doing well is fool’s gold. It always looks much too good on the high side and doesn’t nearly reflect how bad things are on the down side.
The average consumer needs to focus on job creation, real tax breaks (not just for corporations) and truly affordable health care (not just “opportunity” to get it…I have opportunity to get a Rolls Royce, but I sure can’t afford it).
In the meantime, sure, invest if you can, but everyone would be best served just making sure they can pay their bills on time.
What about my story, hinted at above? You know what, it’s not even relevant to the post, so never mind. Just don’t put too much stock in the stock market or in people who try to tell you it’s an indicator that your life is going to get better soon.