Trish: Making Sense of the Total Disconnect Between Stocks and the Economy

We’re higher than 30k on the Dow and most investors believe the market is just getting started.

“How can that be?” A sensible person might ask.

After all, there are plenty of economic clouds on the horizon. Recent data suggests the economy is stumbling as an increasing number of small business owners worry the government will move towards mandatory lockdowns in the coming months. Meanwhile, President Elect Biden is warning Americans to prepare for more challenging times ahead. As such, there’s little to suggest a booming economy is on the way.

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For the market, that should matter–yet, it doesn’t. And, for the foreseeable future, it won’t.

Here’s why: STIMULUS. 

Don’t Fight The Fed

“Don’t fight the Fed.” It’s a valuable lesson that most investors learned in 2008 and it’s, in part, why the market recovered so significantly (and then some) after its lows in March 2020.

The Fed gave our financial system the life-support it needed, just as it teetered on the verge of collapse. It was an incredible and critical feat.

Yet, while the Fed’s actions ultimately saved our entire economy–there were indeed those that benefited from Fed policy far more than others. Namely, the financial system and investors in that system.

As such, the Fed contributed to increased income disparity in America…unwittingly increasingly the divide between the halves and halve-nots.

Fed Increased Economic Divide in America

As for the overall economy, the Fed was helpful in that it prevented a total collapse. Nonetheless, by staying heavily involved for so long, and for leaving interest rates at record lows for a record amount of time, the Fed inadvertently helped create wealth for investors while wage earners saw little growth in earnings.

Indeed, in the ensuring years, GDP growth was barely at 2%–yet, the stock market?

A whole other story. It was on fire.

Once the government signaled that it was on-hand and ready to help, investor confidence returned. Those WITH CAPITAL went to work–buying assets on the cheap. Whether it was Warren Buffet buying a stake in Goldman Sachs or a real estate investor buying a condo in South Beach, people with assets to invest went out and invested. They were rewarded heavily, some might even say excessively, for that risk. Indeed, as the Fed continued its quantitative easing measures (and other mechanisms to increase liquidity) the market continued moving up in value. As such, President Obama ultimately presided over what has, thus far, been the largest run-up in stock prices under any U.S. President.

The market shot up 66.1%…but, the economy as a whole? The economy was stuck.

Market Soars As Economy Remains Stuck

At the time, excuses were made…this was the “new normal” Americans were told. And, between 2008-2016 we saw the rich get richer, while the poor and middle-class stayed poor and middle-class. Some even saw a decline in their standard of living as more and more jobs moved off-shore.

It was, in part, this lack of “real” growth in the overall economy that contributed to a kind of class warfare that caused so many Americans to become so disillusioned with both political parties and helped fuel interest in President Trump’s “Make America Great Again” movement.

A Strong Middle-Class Is Critical to America

There are significant lessons for investors and America as a whole in the 2008-16 time period.

First, investors should recognize the value of the Fed. I, personally, worry that easy money isn’t so easy and these policies will eventually create bubbles that will lead to bigger problems. Systemic problems are always on my radar given the 2008 days…meanwhile, at some point inflation may hit the rest of our economy in ways that are problematic. After all, if you’re saving your money for retirement in an inflationary environment, you risk the reality that dollars will be worth far less in the future.

One way to combat that is by owning hard assets; real estate, gold, etc. Another is to  invest in the markets. Equities and even commodity products being the ones to see the most upside in the kind of environment we now anticipate. Remember to consult your financial advisor to ensure your portfolio is highly diverse and appropriate for your level of risk.

Second, American politicians would be wise to make sure we develop a greater emphasis on the overall economy as a whole. Aiding the stock market through fed intervention isn’t enough. Offering stimulus checks and unemployment benefits also isn’t enough.

A prudent way to address the economic inequalities in America right now would be to offer tax cuts to small businesses and individuals. By enabling small business and individual earners the ability to keep more of their money, lawmakers could help encourage more equitable growth. It’s critical everyone have an opportunity to benefit from stimulus because the reality remains: a strong middle class means a strong economy.

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