Home > Uncategorized > Good news: The stock market is plunging

Good news: The stock market is plunging

from Dean Baker

The stock market enjoys a mythological place not only among mainstream media types, but also among many progressives. For some reason this measure of expected future corporate profits is taken as a measure of economic well-being.

The fact that the media obsesses over the stock market hardly needs to be mentioned. If there is one item about the economy that we can be sure will be repeated every day, it is the movement in the Dow or the S&P 500. And, needless to say, an upward movement is good news and a downward movement is bad news.

But the view that the stock market is telling us something about the well-being of the economy goes far beyond just ill-informed media types. In the lead up to the 2016 election, Justin Wolfers, a University of Michigan economics professor, and a fellow at the Peterson Institute for International Economics, had several New York Times pieces arguing that the wise investors in the stock market recognized that Trump would be bad news for the country. He pointed to sharp declines in the market in response to events making a Trump win more likely.

The Wolfers hypothesis suffered a serious setback in the weeks and months immediately following the election. The S&P 500 was up more than 5 percent in the first month after Trump’s victory. It continued to rise throughout 2017, hitting a peak in January of 2018 that was more than a third higher than its value on the eve of the election.

Wolfers was far from the only one taking stock market movements as a measure of economic well-being under Trump. When the market slumped last fall, there were many Trump critics who seized on this as evidence of Trump’s failings as a manager of the economy.

This view that the stock market is a measure of economic well-being is bizarre, because it is so completely at odds with what the stock market is. The stock market is a measure of the expectations of future profits of companies that are listed in the exchange: full stop.

  1. lobdillj
    August 17, 2019 at 10:33 pm

    Dean Baker wrote: “The stock market is a measure of the expectations of future profits of companies that are listed in the exchange: full stop.”

    Not so since the 2008-2009 conspiracy between the Wall Street “banks” and real estate crooks to create the largest heist in history and be rewarded for that by a no-strings-attached 26 to 29 trillion $ bailout by the US government. The stock market now is a casino where stock prices are pushed upward using criminal creation of money in order to benefit large stockholders.

    • August 19, 2019 at 1:26 am

      “The stock market now is a casino where stock prices are pushed upward using criminal creation of money in order to benefit large stockholders.”

      Why talk about criminal creation of money? Supply and demand don’t require criminals to function. Reaganomics was the idea that decreasing return on investment while increasing investment would cause the economy to grow. In actuality, it caused return on investment as a percentage of investment to drop, which you can see in just about any 50 year US asset graph.

      • lobdillj
        August 19, 2019 at 1:51 am

        The problem is that if you consider the complex cooperation required to pull off the crash and the bailout it could only have happened as a conspiracy. Supply and demand indeed! How very naive (at best).

  2. August 17, 2019 at 11:01 pm

    Regarding grammar, media and data are plural words which at least academia should get right. The stock market is just one facet of overall economic well-being, although a bullish stock market has typically aligned with high employment levels and rising living standards. Since the 1980s, though, living standards haven’t always moved along with stocks. Thomas Picketty has done a great deal of analytical work on that. Also, one increasingly important non-economic factor of well-being in general is Gross National Happiness, and it should be more universally measured and frequently tracked in the future.

  3. August 18, 2019 at 1:49 pm

    This is two problems; 1.Corruption distorts all in a centrally planned economy like the US military empire. Trillions of corruption dollars are sloshing around in secret bank accounts in money laundering entities like the US. 2. Dollars themselves are purposefully not part of the modern scientific measurement system and don’t actually measure anything.

    Anecdotal example; A guy with an extra sixty million dollars wanted to privatize some city functions and rent them back to the poor cash-strapped people, My testimony at city council was simple – Extra money like that is evidence of criminality and we should stay clear of rotten apples. We did not associate with the capitalist thief and his sleazy privatization scheme and our poor little town is still poor and fighting over every penny.

    Dean Baker is correct about what the stock market would measure in a rational society that was not pedal to the metal rushing to species extinction.

  4. David Laurel
    August 19, 2019 at 4:41 pm

    Terribly funny that for years Stock market have pegged most of it investors’ actions on the rise and fall of GDP, perhaps with the imprimatur of economists?

  5. Ken Zimmerman
    August 21, 2019 at 12:54 am

    Have you ever wondered just how a self-regulating stock exchange works? In 1996 it worked like this. The practice of market control, which traders call “self-regulation,” is not simply a neutral arbiter of market relations. It is a powerful tool for both the pursuit and restraint of self-interest. Mostly to protect the exchange and the details of trading. Actions by traders judged opportunistic may, if not curbed serve as the catalyst to escalate normal levels of competition into market-rending conflicts. Informal control breaks down, coalitions of rival market actors emerge, and status quo power relations are called into question. At this point formal control is exercised through the Business Conduct Committee. Most traders are aware the futures pit is an arena for intense competition. Nevertheless, even in the highly competitive futures markets opportunists may attempt to disrupt the competition for the aggressive pursuit of their own self-interest. When a trader attempts to manipulate the price of a commodity by acquiring a “high percentage of the marketplace” it is known as a “squeeze.” This opportunistic strategy involves crossing a subjective line from competition over into conflict. The opportunists push their exchange partners into financial positions which they, and perhaps others, consider “distorted.” Parties no longer compete over price in the open market. Rather, the opportunist confronts their victims and the victims either succumb to the opportunist’s power or demand the protection of the market control system.

    It seems self-regulation has failed, or more accurately failed some time ago. Today the job of enforcing regulations is divided between four basic divisions of the SEC. The Division of Corporate Finance oversees making sure all publicly traded companies disclose the required financial information to investors. The Division of Market Regulation oversees all legislation involving brokers and brokerage firms. The Division of Investment Management regulates the mutual fund and investment advisor industries. And finally, the Division of Enforcement enforces the securities legislation and investigates possible violations. In short, the federal government, through the SEC took over regulation of all US based stock exchanges. The SEC has since the 1930s had final regulatory authority over these exchanges. But not till after the passage of the Commodity Futures Modernization Act of 2000 and the Financial Services Modernization Act of 1999 did the America exchanges begin to change from self-regulation to full SEC regulation. Both laws were intended to help investors and to stop some of the market crises that occurred during the 1980s and 1990s. Under the Obama Administration some worthwhile work was done. Not so under the G.W. Bush and Donald Trump Administrations.

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