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HUBNER: The Stock Market is not simply “The Economy”

HUBNER: The Stock Market is not simply “The Economy”

Jamin Hubner

The S&P500 Index reached all-time highs last week. This is a rather odd time for such events, given that other indicators of the economy suggest some of the worst conditions since the Great Depression. But many view this achievement and say “oh hey, I’m out of a job and everyone I know is struggling, but I guess the economy is doing great…?”

This kind of sentiment illustrates a common myth in popular economic thinking: that you and I are somehow not part of “the economy.” And when we start to see the “economy” as something “out there” instead of our own lives and everyday experiences, something ain’t right.

It’d be nice to pick up my phone and call “the economy” and ask some questions. But that can’t really happen. The “economy” isn’t really a “thing.” It’s an abstraction. It’s a convenient concept that emerges from an accumulation of smaller, concrete interactions and events, right down to the coffee we drank last morning. The earliest economists never talked about “the economy” like we do, precisely because the conceptions weren’t the same. “The economy” is itself a modern concept.

Furthermore, when we want to know how “the economy is doing,” this can mean different things to different people. The economy can be doing well to bond-holders but not for stock-holders, and vice versa. While “the economy” was doing so poor in Spring of 2020 that the government mailed out checks to everyone, the “economy” was also doing so well that the richest people in the world made over $600 billion in a matter of weeks. All of this means that we have to be careful about using the term “the economy.”

Besides this, there are big reasons why the stock market is not (or at least, no longer) simply an indicator of the larger “economy” we live in, or even the best one.

First, remember that when people say “the economy is doing great” and point to the SP500 or Dow Jones Index, what they are really saying is “the economy” = “US stock market” = “SP500 and Dow Jones and other Indices” = “valuation of companies as a whole” But (a) there are many economies and markets other than the US stock market, and (b) the indices exclude hundreds of publicly-traded companies and are themselves a limited slice, and (c) the stock market only measures publicly-traded companies and excludes thousands of private companies. The “stock market” in common parlance, then, is highly selective, and only one slice…of a slice…of a slice.

Second, in recent times, “the stock market” has become an absolutely horrible indicator of any economy at all. Why? Because people aren’t buying stocks because they’ve done their homework and want to invest in a good company—a company with good leadership, produces valuable products, and makes the world a better place. No, instead, a growing amount of “investors” are speculators, trading based on optimism or fear, or on the belief that other people are thinking similarly or differently than themselves. Many people buy stocks simply because others are doing it and, well, what else do we do with our money?

But if the buying power that raises stock values isn’t based on financially-sound conditions (i.e. the realities of actual balance-sheets and income statements), but instead on the generic idea that “it will always end up going up,” the valuations are artificial. It’s not based on production or consumption, or anything. It’s pure psychology—belief. In other words, the valuations constitute a bubble.

I made the same argument some weeks ago in another essay, “And the Real Estate Markets Went Wild?” It’s just another aspect of the same story: we are witnessing an asset bubble like never before. By “asset bubble,” I mean that certain assets—whether stocks or real estate—are breaking records based on hype and speculation instead of financial and economic fundamentals. And by “like never before,” I mean in an economic context where unemployment is terribly high, corporate and public debate through the roof, production levels are at record lows, and a central banking system that’s creating digital currency out of thin air like there’s no tomorrow.

Third, there are many indicators of the whole economy besides the public equity market. Production and growth—often measured in GDP (Gross Domestic Product) and GO (Gross Output)—are another set of indicators. Others include financial ones, like household, corporate, and public debt-to-asset ratios, debt-to-GDP ratios, etc. Maybe all of this is supposed to be baked-into the stock market valuations. But they aren’t! If corporate debt and public debt was viewed negatively instead of positively, the stock market would be at all-times lows, not all-time highs.

Fourth, the stock market is manipulated by hedge funds trading on up to 15x leverage. Massive swings are caused by a handful of buyers and sellers that know who and how the market is moving for. Trading based on volume, momentum, and volatility has nothing to do with how any company or series of companies are doing. It is nothing to do with real production of stuff that people consume or enjoy. It has to do with technical analysis and speculation for short-term profit. Long-term investing still happens, but that’s not why the bulk of buying trades occur anymore.

Fifth, the profit of CEOs is now largely tied to stock market prices. Jeff Bezos, Bill Gates, and Elon Musk didn’t become the richest people in the world because of their fixed salary. It was because they are entitled to or own a portion of the company’s stock, so if they want to be worth more and make more, they have to make the company worth more. It sounds like a good deal, because it aligns the financial incentives of the managers and company. However, this arrangement may actually pervert incentives, because the CEO or managers are more inclined to do whatever it takes to boost their stock price in the short term (e.g., “quarterly earnings”), and not build a good company for the long-term. These superficial boosts in value then attract others to buy, boosting prices up into an even bigger bubble, until eventually this short-term game becomes a long-term joke (with everyone’s incomes and retirement on the line!).

All of this means that only a small percentage of the stock market’s valuation, then, might indicate real economic growth across an economic sector. Figuring out what that actually is, is difficult work, like searching for grape tomatoes in a garden overrun by weeds. It also means that the dramatic swings in stock-market valuations (volatility) is going to hang around, or maybe get worse (google “VIX” and look at short and long-term charts). Finally, it also means that the smarter investors know how this game works, and are trading accordingly. They will even flee to a completely different asset class—like gold or cryptocurrency, both, ironically, that have made massive gains in the last month as the dumpster fire of 2020 continues to burn.

So if you want to know how “the economy is doing,” then, the stock market shouldn’t be the first place. Look at GDP, unemployment, household debt ratios, and talk to lots of neighbors.

Dr. Jamin Andreas Hübner is the CEO of Efficient Business Consulting LLC and a professor of economics at Western Dakota Tech. For comments, questions, or corrections, write to

(Correction: The last essay in my column asserted that The Bread Root in Rapid City was employee-owned, when in fact, it is member-owned.)

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