Why the stock market is immune to Covid-19

Marketplace reports the stock numbers every day over the radio, accompanied by music chosen to describe the aggregate trends of that particular day. Loud celebratory music denotes rampant buying, pleasant mid-tempo jazz indicates an unremarkable day with mixed results among the major indices, and slow saxophones signal selling all around. 

Back in March and April as the Coronavirus shutdowns began across the country, Marketplace was an altogether depressing broadcast; stories of rampant layoffs and impending bankruptcy were followed by those sad saxophones for days and weeks on end. In May though, this began to shift. The stories of double digit unemployment and business failure remained, but it was followed instead by upbeat music as stocks rebounded. FiveThirtyEight noted in a related article that the S&P 500 had nearly recovered all of its losses by the first week of June. 

So why the change? The economic news was essentially the same, so why were the indices suddenly heading towards new records as cheerful trumpets sounded in the background? The short answer comes in the form of an unsatisfying but much-used phrase among economists: the stock market is not the economy. The sentence is a simple one, but the reasons behind it are anything but. 

A major factor in the disconnect between real people in the economy and the stock market is the very structure of the market itself. “The stock market is a market where stocks, a type of investment that represents ownership in a company are traded,” Jessica Schieder, a federal tax policy fellow at the Institute on Taxation and Economic Policy, told Marketplace. These stocks are traded both individually and through indices, which are collections of stock that are meant to be representative of a particular industry or segment of the economy. For example, the Standard & Poor’s 500 uses the performance of the 500 largest publicly traded companies in the United States to provide investors with a snapshot of the entire market. 

The S&P is one of the most widely utilized indices in the US market, but the numbers it reports aren’t necessarily representative of the actual market. The S&P, like many indices, weights its stock using market capitalizations which allow bigger companies to have a larger influence on the index. “By design, the S&P 500 includes only large companies. Only the biggest companies with massive market capitalizations (usually above $8.2 billion) are included—think of large firms like Apple, Alphabet, Amazon, Microsoft, JP Morgan Chase, and Berkshire Hathaway,” Tim Lemke at The Balance writes. “As of April 30, 2020, the breakdown of sectors in the S&P 500 was as follows: Information technology: 25.7%, Health care: 15.4%, Communications: 10.8%, Financials: 10.6%, Consumer discretionary: 10.5%, Industrials: 7.9%, Consumer staples: 7.4%, Utilities: 3.3%, Energy: 3%, Real estate: 2.9%, Materials: 2.5%” Due to market capitalizations weighting in the major indices, companies in tech and health care have an outsized influence on the market as a whole. 

According to AP Economics teacher Chris Harvey, “Standard and Poor’s (is made up of) very big companies and they are much more resistant to economies going down than mom and pop or mid-size companies. [Smaller companies] are going to go under, those are the ones that are losing the most employees, which is what you’re seeing in the economy as far as unemployment goes…This hasn’t been bad for all companies, and the ones that are at the top of the market are the ones that have been aided by [coronavirus].”

This begins to expose the factors behind the strange behavior of the market. The pandemic has been lucrative for companies in tech and health care as Americans begin to work and function online and collectively begin to buy unprecedented amounts of hand sanitizer and surgical masks, and the success of these companies is weighted to such an extent in the market that the failures of small businesses not even represented in the indices and of those in less influential industries are overpowered. 

Not only are wealthy companies overrepresented in the stock market, but wealthy Americans are too. According to the Pew Research Center, even though 52% of Americans have some type of investment in the stock market (usually through a 401k), 88% of families with incomes above $100,000 own stock at a median amount of $130,000 while only one in five families with incomes below $35,000 own stock at a median amount of less than $10,000. This means that the wealthy in this country, who have been much less affected by the economic ramifications of the pandemic than poorer Americans, have by far the most influence on stock.  Economics professor at George Washington University and senior fellow at the Indeed Hiring Lab Tara Sinclair told FiveThirtyEight, “People, particularly the rich, have cut back their spending, so they need to park their funds somewhere like the stock market. Inequality can mean that even with millions out of work, there might still be a glut of funds from the high-earning and/or high-wealth individuals.” 

Minorities have also been more likely to have been adversely affected by the pandemic, and are simultaneously less likely to hold any influence over the market. June 2020 polling by Gallup reported that 64% of non-Hispanic whites own stock, while only 42% of non-Hispanic blacks and 28% of Hispanics do. These inequalities further depress the representation of coronavirus-related harm in the larger market.

Finally, Stocks are notoriously fickle. Harvey notes that “[The market’s] not based on reality, it’s based on people’s perceptions. The economy is tied to what’s actually going on; people are buying, people are not, people are employed, people are not- it’s all factual…The market responds a lot to what people feel and think, and not necessarily to what is actually happening.”

This emotional and often irrational piece of America’s economic landscape influences everything from who we choose to lead our country to our security in retirement. The idea that unemployment can be as high as 8.4% on the same day that the S&P 500 hits another record high emphasises the underlying preconditions of a vast wealth and power gap and social stratification that determine the lives and futures of American citizens.