There is a fascinating column in this morning’s NYT: Why Markets Boomed in a Year of Human Misery. Written by Neil Irwin and Weiyi Cai, it includes great infographics and dissects the odd juxtaposition of what appears to be a very bad economy versus a strong stock market.
Here is the nut graf:
“The central, befuddling economic reality of the United States at the close of 2020 is that everything is terrible in the world, while everything is wonderful in the financial markets.
It’s a macabre spectacle. Asset prices keep reaching new, extraordinary highs, when around 3,000 people a day are dying of coronavirus and 800,000 people a week are filing new unemployment claims. Even an enthusiast of modern capitalism might wonder if something is deeply broken in how the economy works.”
Normally, at this point I would be discussing how the markets and the economy have surprisingly little correlation. But Irwin and Caif go a very different way, showing that despite the terrible headline news, the economy — in terms of total income flowing to the public — experienced what the data shows to be only a modest recession:
– Salaries and wages fell “only” 0.5% over 9 months, despite payrolls falling 6.1%; Wages & salaries dropped “only” $43 billion over 9 month as weak sectors were offset by booming sectors;
– Lost jobs were disproportionately in lower-paying service sector; Higher-paying professionals were mostly unaffected;
– The CARES Act added $365 billion in unemployment insurance programs to $499 billion; it also gave $1,200 to most households, for an additional $276 billion;
All of those “markets are crazy” conversations ignored the specific details above. There are lots of important issues here, but none is more important than erroneous assumption that markets are somehow directly tied to the economy as you personally experience it.
Yes, sometimes traders go crazy and Mr. Market loses his mind. However, 2020 was not such a year. The devil is alway in the details.