Market Strategist Warns 'Pain Felt On Main Street Quite Distinct From What's Reflected In Stock Market'
(CBS New York) -- Seven months into the COVID-19 pandemic, and Wall Street is doing well. The Dow Jones Industrial Average closed at 28,514.76 on Wednesday afternoon, over 3,000 points above where it found itself at the end of February, the last full month before COVID took hold of the economy. The Dow would drop to a 2020 low of 18,591.93 less than a month later. But a steady upward trend has lifted it almost 10,000 points since.
The economy hasn't rebounded to that degree. It remains far below its pre-COVID level. Even with the modest growth promoted by the CARES Act, which has since leveled off, the threat of a double-dip recession looms large.
And Main Street is doing even worse. "Things are not looking up for small businesses," says Yeva Nersisyan, Associate Professor of Economics at Franklin & Marshall College. "A lot of them will probably close permanently. A lot of job losses have become permanent. I think about 2.5 million of the job losers are permanent job losers compared to February numbers. So that's not looking good for now."
Job growth is slowing, and layoffs are rising. Last week 898,000 people filed for unemployment benefits for the first time, the highest level of new jobless claims in two months. Another 373,000 more who don't qualify for traditional unemployment requested Pandemic Unemployment Assistance. To frame it a different way, 25 million people, over 15 percent of the workforce, are currently receiving some kind of unemployment benefits.
So why is Wall Street thriving while Main Street and other parts of the economy are struggling?
The simple answer is that the stock market and the economy are two different things.
"The stock market is a subset of the economy," says David Joy, Chief Market Strategist for Ameriprise Financial. "It represents companies, private companies, whose ownership is publicly traded."
There are different stock market indexes. The Dow Jones tracks the stocks of a select group of 30 big publicly owned companies, including Apple, Goldman Sachs, Microsoft, Wal-Mart, Walt Disney and others. The S&P 500 is a broader stock market index that spans 11 sectors of the economy and follows the stock performance of about 500 large-cap, U.S.-based companies. Those include Alphabet (Google's parent company), Amazon, ExxonMobil, Facebook, UnitedHealth and many others. There is plenty of crossover between these two indexes, but each provides a snapshot of the stock market and economy.
The stock market "does not represent all of the economy by any means," Joy elaborates. "It doesn't represent the public sector, which is a significant component. So, federal government, state and local governments, not represented. And it doesn't represent the financial condition of the vast majority of Americans, who don't own stocks. And so, as a result, the performance of the stock market doesn't necessarily reflect the performance of the economy. The two tend to go hand in hand. But one is a subset of the other."
Another portion of the economy not represented in the stock market is small businesses. "If you define Main Street as encompassing small business, small business is struggling," says Joy. "In particular, certain parts of the small business community, particularly in areas that are defined as restaurants, hotels, retailers. They're struggling because of the restrictions imposed by the pandemic for social distancing, as well as just, in general, the consumers' reluctance to socialize, to go out to eat. There isn't a lot of confidence within the consumer sector to reengage in those activities yet. And I think that's likely to stay the case and maybe even get a little bit worse now with the evidence that the rate of infections is rising again and rising quite sharply in some places. So the pain being felt on Main Street is quite distinct from what's being reflected in the stock market."
The companies suffering the most from the pandemic's economic fallout -- restaurants, hotels, airlines, cruise lines, specialty retail -- make up a small portion of the stock market. "Those in the aggregate represent less than 5 percent in the stock market," Joy surmises. "In contrast, there were some very large companies and sectors of the stock market whose business prospects were enhanced by the pandemic. Especially companies involved in the internet space, benefiting from the work at home, and stay-at-home phenomenon. And so the stock market is reflective of both good and bad. But I would say disproportionately reflective of some of those who've benefited from the pandemic."