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Everything is canceled. Unemployment is at Great Depression levels. More than 130,000 Americans are dead. So why is the stock market doing so well?

The staff writer Derek Thompson joins James Hamblin and Katherine Wells on the podcast Social Distance to explain why Wall Street seems divorced from reality.

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What follows is an edited and condensed transcript of their conversation.

Katherine Wells: I’m going to read you this headline from last week: “U.S. Stocks Cap Best Quarter in Two Decades.” I feel like there’s something missing here.

Derek Thompson: Yeah, the stock market is super confusing right now. One way to think about this is that the stock market is not a reflection of the economy today. It is an indicator of what investors think will happen in the next five to 10 years. The easiest way to explain the gap in optimism that’s opened up between basically everything that isn’t the stock market and the stock market is the fact that a lot of investors looking at the sharp recovery that a couple economic statistics have made since the bottom hit in mid-March has made them optimistic about the fact that we might not recover 100 percent from this pandemic and this economic crisis in the next six or nine months, but they’re seeing things that make us think that in the next year or two years, things are basically going to be where they were in January and February 2020.

Let’s think about three different categories: housing, cars, and big internet stocks. Houses and cars are really important to think about, because they’re the most expensive purchases that people tend to make. And then internet stocks are important because they have been driving stock-market growth for the last few years. All of those look like they could pretty much recover or are already basically at higher levels than they were in January and February.

First, the housing market is doing bizarrely fine. New-home sales are higher than they were a year ago. Mortgage applications are higher than they were in late February. Home-construction projects based on some online marketplaces are higher than they were in January and February. In previous recessions—certainly the Great Recession—housing was just destroyed. And in this recession, housing is actually doing totally fine.

Then you look at something like cars. Right after houses, cars are the most expensive thing that people tend to buy in their life. And there’s every reason to think that the car economy is going to be pretty much fine as well. You have a lot of Americans that look like they’re going to move to the suburbs because people are going to be a little bit freaked out to live in crowded areas. And what do you need in the suburbs? Well, you need cars. There’s every possibility that you could have an auto recovery that is pretty much fine after the next year.

And then, finally, you have internet stocks, and they’re doing sensationally. I mean, the plague economy has basically shut down face-to-face interactions for large parts of the population, which means that if you do anything, you have to go online. Microsoft, Apple, Amazon, Google, Facebook, Cisco, Adobe—practically all of them have seen gains this year, and the gains of those large tech companies have essentially driven the stock-market recovery.

James Hamblin: Do you know what percentage of Americans have money in the stock market, apart from 401(k)?

Thompson: I don’t know apart from a 401(k)—because I do think, for a lot of people, that’s the most important way that they’re invested—but stock-market wealth is highly unequally held. Something like 90 percent of stock-market wealth is held by, I think, the top 8 or 9 percent of Americans.

Hamblin: I think I maybe understand a little bit more: Some companies are doing well enough that, overall, the average of the stock market doesn’t look that bad. In fact, it looks really good, because it’s recovering from that big crash in March. But certainly some things have taken big hits and, overall, money maybe just moved to sectors that are more in line with what’s needed in pandemic life.

Thompson: I think that’s a great summary.

Hamblin: In the past, or in an alternate universe where more people held stocks and they were suddenly feeling widespread economic insecurity, they might sell their stocks. They might feel they need money now, so they cash out of the stock market. And then the stock market could crash because people needed liquid money right now because they just lost their job.

But when you have so much of the stock market controlled by super-wealthy people, who are going to groan and be upset when the stock market goes down but don’t really need that money to live, they’re just going to kind of hang in there and move it around. And that creates a sort of stability for the stock market that might not have been there in the past.

Thompson: I think it’s a pretty good summary. Because the stock market tends to be determined by higher-income people’s wealth, it is essentially a reflection of what higher-income Americans think about the future of corporate America. And the fact that the stock market’s doing pretty well right now tells you that a lot of higher-income Americans and the institutions and funds that they represent are optimistic about the fact that, even though the economy right now looks really shitty, there’s a lot of big publicly traded companies about which they’re really optimistic. Most of these companies are tech companies: Microsoft, Apple, Amazon, Google. They’re really optimistic about these companies getting bigger and bigger.

And as a result, rich people’s optimism about big companies seems to us like everybody’s optimism about the entire economy. But those are two different things. I think that rather than see the stock market as some plutocratic grade of the entire economy, you should see it as just one part of a very complex system that is the economy. When you see that restaurant sales are up, that says something important about restaurant sales. When you see that hotel bookings are down, that’s something really important about hotels. When you see that the stock market is up, and you see that it’s up mostly because investments into large tech companies are soaring, that says something really important. It tells you that lots of institutions and rich investors see the digital economy basically shooting forward 10 years to 2030 in terms of its power and its revenue and, correspondingly, its profit.

So rather than say, “Oh, this is anomalous, it’s divergent, we should ignore it,” I think we should pay close attention to it. It’s telling us something important about the economy, even if that important thing doesn’t feel nice to think about.

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