Fishy Times in the Stock Market Sea

Your guide to shark identification

Over the last several months, unemployment rates have risen to their greatest levels since the Great Depression. Businesses are closing at rates faster than ever before seen in a six month period, and corporate bankruptcies are climbing at comparable rates. On a global scale, the world economy has hit its largest roadblock since Black Tuesday and the Great Depression. 

Despite these gaping wounds in the overall financial health of the United States, the housing and stock markets appear largely unaffected. Quite the opposite, in fact. Since the dip of March 23rd, the stock market has risen at least 40% across the board, meeting pre-dip highs and even surpassing previous valuations in some instances. In many areas of the country, real estate prices have not only stayed the same, but also increased. 

So, dear reader, how is any of this possible, you might ask? How are the scheming snakes of Wall Street getting richer while over 30 million people are solely relying on unemployment relief to buoy their sinking ship? The answer begins with everyone’s old, pesky friend - debt. 

Who’s debt, though? The government’s, unfortunately. I know I know. You’re probably thinking, “How is it possible that our squabbling leaders seem incapable of agreeing on a way to balance a checkbook?” It’s wild to think that just forty years ago the US government actually operated with a surplus, not multiple tens of trillions of dollars threatening to entomb the entire United States with its crushing weight. 

In this case, the debt is actually benevolent, at least on the surface. Governments take out debt in order to distribute it to small businesses and individuals, with the intent of stimulating the economy and not having the GDP bellyflop. Reports from around the world reveal an aggregated debt withdrawal of ~$17 trillion among governments. Typical years yield ~$7 trillion of debt accrual from international governments, meaning that the rate of debt acquisition is more than twice it’s normal speed. 

In addition, businesses and individuals have racked up substantial amounts of debt in the last several months. American household debt is tracking at $14.6 million, and a recent survey found that ~47% of American households now hold credit card debt, up from 43% the previous year. The debt stimulus that the United States has been pumping into the economy is keeping small businesses and individuals afloat for the time being, and lending a sense of confidence to the American populace and the stock market overall. Without the stimulus, many surmise that the US economy would have already crashed ten times over. 

Another factor aiding this stimulus adrenaline booster of the economy is the massive amount of money that the Federal Reserve has printed. Something on the order of $3.5 trillion has been added, created out of thin air, and lent to businesses in need or given to banks as cash reserves. 

What we’re really seeing is a temporary fix. Wall Street’s fund managers work quarter to quarter, typically 90 day cycles, with the incentive to maximize profits within that timeframe. Thus, if the economy is currently buoyed by consecutive stimulus bill life preservers, it’s full speed ahead to continue trading, buying, selling, shorting, etc. With no mental acknowledgement of the fact that these trillions of dollars of debt will be paid off because their heads are too far in the sand of the present, none of the fear and uncertainty that seem natural to feel at this point have been injected into the market. Hence, the return to record highs across the market. 

Fund managers have received additional incentive to continue trading like this because the behemoth companies of the stock market have actually done well during the pandemic. Amazon, for example, the third largest public company in the world, experienced a 17% increase in revenue in the last quarter. Apple, Microsoft, Facebook, and Google also had notable increases in earnings, contrary to the growing conflagration of the US economy. 

What’s worse, these five companies make up a staggering 20% of the S&P 500’s value. The S&P 500 is often seen as the driver of the overall stock market, and a significant portion of which is constituted by only a few companies. Further, these companies are some of the most widely traded, giving fund managers more opportunity to ignore the looming debt crisis and instead hunker down into the present irrationality. 

Down in the bowels of the proverbial rabbit trail, it gets even worse. Many view the broad stock market as being made up of millions of investors, big and small, all looking to make returns on their invested capital. In reality, there are only a handful of investment groups that make up the vast majority of trading activity across the market. Some of their names will be familiar: SPDR, BlackRock, Vanguard, Bridgewater, UBS, JP Morgan, Goldman Sachs, and more. Each institution manages between $500 billion and $7.4 trillion worth of assets. That’s no lie. If you just choked a little, I did too. 

Let’s break down what one company managing $7.4 trillion worth of assets actually means. The average American household has around $50k invested in the stock market, either directly through individual investing or indirectly through retirement accounts. This means that a company like BlackRock (all $7.4 trillion of it) has as much clout in the stock market as 148 million American households. *Cue boxing bell as jaw crashes into floor.

This is a revealing fact. Perhaps the attitude and temperament of the stock market has more to do with the action of the investment institutions that are comprising the large majority of it than the economic reality facing the American populace? Since there’s money being pumped into economy and some of the largest companies comprising the stock market are doing well, it’s a no brainer for investment firms to keep purchasing shares, and I believe it’s this acquisitory mindset that is driving the markets higher and higher. 

If the fear and uncertainty that’s  present on Main Street was reflected on Wall Street, there’s no chance investment firms would continue to acquire stock. As noted before, the short term goal of a fund manager is to increase profits within the quarter, or at the very least not lose any money. If these fund managers were worried, selling is the quickest way to ensure you don’t lose money, or at least don’t lose any more. But they’re not selling. No one is selling. It’s open season out there. At least for now.

I’d love to hear your thoughts, rebuttals, criticism, affirmation, or any type of feedback below!

Thanks for reading :)