https://tjpolitics.blogspot.com/search?q=stock+market
"The economy" is not just one thing, but a number of interconnected things, some of which effect our daily lives and some which have more long-term implications. We're not going to look at every aspect of the economy, but we're going to zero in on what the stock market tells us about the overall stability of the overall economy and what it doesn't.
The first thing that it's important to know is that there is no "Stock Market", as in a unitary entity that we can point to and say "that's the stock market". There are several organizations in the United States which exist to facilitate the trading of stocks, The New York Stock Exchange is the most well known, as is the National Association of Securities Dealers Automated Quotations (NASDAQ), there are also exchanges in other US cities, as well as in other countries. Think of these exchanges as marketplaces where stock can be bought and sold.
The second important fact to know is that when a politician or economist refers to "the stock market", they are not referring to the totality of traded stocks, but to a narrow slice called the Dow Industrial Average. The Dow Industrial average is a weighted average on 30 stocks. Yes, just 30. And weighted by what? Price. Stocks that are higher priced are weighted more heavily than lower priced stocks, which skews the average. (See further explanation in the link above)
The third important thing to realize is the increased stock valuation of the Dow, or even of just individual stocks, is just paper profits. If you hold a stock certificate you don't actually have any money in the bank. You may have 100 shares of stock worth $1000 each, but all that means is that if someone buys that stock from you for $100,000, you have $100,000, until you sell that stock you merely have the potential for $100,000. It is entirely possible that some event will cause the stock valuation to plummet and your stock will be worth nothing. Even assuming that the value goes up, you're just moving money around. You're often not even contributing operating capital to the underlying company unless it's an initial public offering. Wealth isn't really being created, it's just being moved around.
So, what determines the value of a given stock? A combination of a company's profitability, supply and demand, and most importantly, perception. A company's stability and profitability will be a factor if an investor is looking to make long-term investments. Supply and demand come into it, since, like anything else, if a certain stock has a lot of people clamoring to but it, then the sellers will be able to increase the price. The biggest contributor to a stock's value, however, is perception. If a company is perceived to be on the road to greater profitability, then more people will be interested in buying its stock and the laws of supply and demand will drive the price up.
What influences an investor's perception? A technological breakthrough, a new product, or a change in leadership might lead an investor to conclude that profits will rise, as will a government administration that tends toward fewer regulations. The upward trend in stock prices during the Trump presidency was fueled in part by his antipathy toward regulations, as well as by the 2017 corporate tax decrease. But the bottom line in investment decisions is that it's all a gamble. Investors are gambling that the price they paid for stocks will continue to increase.
So, back to our original question: Is a "record" stock market a sign of a healthy economy? In the first paragraph I tentatively answered "Maybe or maybe not". There are aspects of the economy which are reflected in the stock market. Rising stock price averages generally reflect confidence, but confidence in what? Confidence that a given company will continue to be profitable, inspiring more people to want to buy its stock, therefore causing the stock price to rise. The assumption then, is that the confidence will be rewarded and that the companies that represent the stock market will be profitable. The further assumption is that a profitable company will increase investment and employment, spreading the wealth around so to speak. But is that the correct assumption to make?
Not necessarily.
The goal of anyone running a large company isn't to create jobs, although that may be a side effect. Any company that can increase profits without increasing, or even maintaining, employment levels will do so. Anyone who has been involved in planning at any level in a capitalistic endeavor knows that the first area that is cut if profits are threatened is labor. And it doesn't take a threat to the profit margins for jobs to be eliminated, even a desire to maximize the amount of profit can result in a reduction in the workforce if other methods don't easily present themselves. Of course, in some industries, expansion will require additional workers. If you're going to open another factory, you'll need additional factory workers, but if you're just going to increase output, it might be done just by increasing productivity - pushing people harder or by automation.
Theoretical considerations aside, what does the stock market's (i.e. the Dow Jones Industrial Average) record high valuation tell us about the economy in general? Very little. The official unemployment rate is still close to 7%, around twice the level it was at the beginning of the pandemic (although around half its nadir of 15% a few months ago); we are still looking at a huge net loss in jobs compared to the first of the year; many small businesses have closed and whole segments of the entertainment and service industries have shut down; evictions are at an all-time high.
It's obvious that these stratospheric stock prices are not translating into better conditions for people who aren't in the top 1% of the country. They're not even necessarily translating into increased profits for the companies issuing the stock. What they represent is a gamble, not on the prospects of these companies increasing employment and investment, benefitting broadly, or even their long-term profitability, but that stock prices will increase enough to guarantee a profit to the gambler when the stocks are sold.
"The Stock Market" is an illusion of economic health, not the reality.
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