The stock market went on a tear last week, even as Labor Department data continued to show signs of an unrivaled catastrophe. The juxtaposition between the two indicators, a boom in the stock market and a bloodbath in the labor market, seems like something out of a dystopian satire of capitalism.
Everything that is wrong with America, in one image. pic.twitter.com/ugrft95bAv— Justin (@JustinAHorwitz) April 9, 2020
That interpretation might be correct.
One way of looking at the recent market surge is that emergency actions undertaken by Congress and the Federal Reserve seem very generous to the kind of big companies whose shares are likely to be listed on the stock exchange. Individual workers and smaller companies are getting arguably less generous treatment, so it’s possible that owners of financial capital will weather the pandemic storm more easily than the rest of the country.
A more optimistic take is that we are looking at time mismatch. The stock market is a forward-looking creature — the coronavirus crash started weeks before the layoffs did — and our labor market data looks backward. Last Thursday’s report told us there were a lot of job losses the previous week. But social distancing is working, and the stock market is telling us that the economy could bounce back soon as we successfully flatten the curve.
The final possibility is that the stock market is simply misinformed. Investors spent most of February underreacting to the virus, seeming to discount the possibility of a pandemic right up until February 20 when the market suddenly started sliding.
My colleague Ezra Klein says his reading of plans to reopen the economy left him scared, and I tend to agree. Public health experts are talking about a longer, slower, more partial and more halting recovery process than I think most people realize. I don’t dole out stock market advice, but I wouldn’t be surprised if it turns out that investors have been paying too much attention to happy talk from the president and a handful of business executives and not enough to the sobering scientific realities.
Here are three ways to look at it.
Option one: Class war
The most straightforward reading of the mismatch between the stock market and the labor market data is that Congress did a much better job preserving the value of capital owners’ investments than of saving jobs.
The Federal Reserve is planning to take $85 billion appropriated by Congress and use it to finance $850 billion in corporate bond purchases. That, paired with purchases of government bonds, should ensure that the kind of big, credit-worthy companies that make up the bulk of the stock market are guaranteed the ability to borrow money cheaply.
The idea is that by preventing companies from needing to file for bankruptcy or liquidate their assets during the crisis, we can basically put the economy on ice and then come bouncing back in the future.
But there are few strings attached to this money, and in particular, it doesn’t require companies to avoid layoffs or other cutbacks.
The program to lend money to smaller companies, meanwhile, involves some more implementation complexities, and it looks as though the government is having some problems actually getting it out and running.
During the Great Recession, the stock market had fully recovered by the winter of 2012-2013 but the labor market took at least five more years to really heal. We could be watching the early phases of a repeat play out in real time, only now exacerbated by the very real health risks grocery store and delivery workers are running for the sake of their generally low-wage jobs.
Option two: Timing mismatch
A more optimistic approach is that last week’s strong stock market is a preview of broader good things to come.
Labor market data reports with a lag. We learn on the first Friday of every month what the unemployment rate was on the 12th day of the previous month. We learn every Thursday morning how many new unemployment claims were filed in the week that ended the previous Sunday.
The stock market, by contrast, reports in real time. And investors are trying to make guesses about the future of the economy.
Back in late February and early March, you could have done split-screen stories about how the stock market was tanking but the labor market was fine. And indeed, since roughly 80 percent of the value of the stock market is owned by the richest 10 percent of the population, for most people the initial coronavirus stock crash wasn’t really a big deal. But in that case it served as an early warning system about economic trouble ahead, and by late March it was clear that stock market pessimists were correct.
Since the labor market collapse began, we’ve learned that the US Congress is willing to spend big on fiscal stimulus. The Federal Reserve has been more active and creative than it was during the Great Recession. And we’ve learned that social distancing policies, though costly, are working to slow the spread of the epidemic in the United States and bending the curve downward in Spain and Italy. This is arguably all grounds for optimism, optimism that is reflected in the rebound of stock prices even if it will still take a couple of months for it to result in a surge of rehiring.
Obviously, in terms of economic recovery, sooner is better. But the stock market being a slightly leading indicator is a world of difference from there being a massive years-long divergence in the fortunes of workers and investors.
Option three: A big mistake
Perhaps the bleakest possibility of all is that investors have simply gotten too optimistic. It’s true that intense restrictions on activity seem to be effectively slowing the spread of the virus. And it’s true that the Italian and Spanish experiences suggest that means we could be seeing declining deaths and case volumes by the end of April.
But President Trump’s talk of “opening up” the economy once that’s accomplished ignores the obvious reality that if inactivity controlled the virus then returning to activity will likely bring it back. That would prompt new rounds of shutdowns and job losses.
Alternatively, even in the absence of formal orders, people could still behave responsibly and prevent the spread of the virus. But if white-collar workers stay home, that’s still devastating to the business models of dry cleaning shops and downtown lunch spots. If 70 percent of the population dines out 70 percent less frequently, that’s a 50 percent drop in restaurant traffic, and everyone’s businesses will fail.
A modern service economy relies on lots of people doing stuff in person that isn’t strictly necessary. Absent a vaccine, won’t business stay depressed at hair and nail salons, gyms and yoga studios, bars and theaters, and all kinds of shopping malls and retailers more or less indefinitely? And if that’s the case, how well will the rest of the economy hold up given the large economic losses incurred by service-sector workers and business owners?
There’s a strong possibility here, in other words, that investors simply aren’t thinking this through very clearly. People may not be indefinitely stuck indoors and largely unable to even sporadically see friends and family, but it doesn’t follow that the economy will be “back to normal” anytime soon. Worst of all, a large minority of incautious people going out on the town and gathering in large groups is enough to potentially generate new outbreaks but isn’t enough to generate a healthy business climate. For the majority of people to resume the pre-virus pace of life would require not just some good news on epidemic mitigation but breakthroughs of the sort that we simply aren’t seeing.
A world of known unknowns
The nature of the stock market is that it goes up and down on a daily basis. Some of that is everyday people making trades based on their personal sentiments or changing financial situation. And some of it is professional traders with huge sums of money and powerful analytical tools at their disposal, trying their best to make money.
But every guess professionals make about the future of the economy hangs on the reality that there are a lot of facts about the virus and about human society that simply don’t have clear answers at the moment.
The leading experts in the field aren’t sure how many unrecorded infections there have been or how much immunity a past infection might bestow. We don’t really know how transmission of the virus is affected by the weather, how effective homemade masks are at reducing the spread, how much lethality is impacted by air pollution, how effective various treatments doctors are trying are, or exactly which elements of social distancing are packing the most punch right now.
Financial markets are pretty good at processing information about changing conditions. But the actual quality of the information available right now simply isn’t that good. Viruses spread much more rapidly than gold-standard scientific papers can be published, which means that even well-informed market participants are to an extent flying blind. For those of us trying to glean information from the markets themselves, it seems like up is better than down. But there’s simply no getting around the reality that uncertainty about the facts dominates any effort to project the future.