Main St. is still in an economic recession because of the COVID lockdowns. Unemployment in October is still twice as high as it was going into the recession. Workers getting by on unemployment benefits measured at 6.8MM last week, still higher than any point prior to the COVID crisis. We have not seen the credit card delinquencies, bankruptcies, and other traditional signs of economic distress yet. It can be attributed to the forbearance programs the government is using to prop up companies and individuals, keeping those numbers looking artificially good. As soon as those programs end, expect a wave of negative data. Sometimes the best barometer of the economic is to just ask anyone walking down Main Street, “how they are doing?” The citizen will tell you; “my personal income has been steady and government loans have kept my small business I own going. But I knows that it will not last.” This is a stark contrast to talking to a person on Wall St. On Wall Street, the stock market is at an all-time high and volatility is really making their treading revenues look great! We’ve all heard “the stock market is not the economy” but how can they be so disconnected right now?

The S&P 500 is currently up 10% YTD. Almost like the market doesn’t even realize a pandemic is going on! For a moment this year the stock market was down. For 116 days this year the stock market was below its January 1^st level. At the worst point it was down a whopping -32%. That has all changed while the economy remains in a depressed state. From that March low, the S&P 500 has added $5.7 trillion to its value. Which leads to the main question I try to answer, where does this value come from?

It seems counter-intuitive that the stock market can be adding value at this time. With Main Street suffering and citizens worrying about job security, one would think Wall Street would be in the doldrums with us. Looking for the value that was added, the first suspect has always got to be the “value” creator in chief, the Fed. Since the pandemic has hit, the Fed has added over $2 trillion to their balance sheet in the form of mainly Treasury purchases. The Treasury got this money out into the system where it seemed to disproportionately help Wall Street over Main. This is $2T is suspect number one for the increase in the stock market.

Though this money did not find its way into equities right away. It went out in the form of stimulus to individuals and businesses. Those people then either directly invested or indirectly invested by using their stimulus to supplement their purchasing. For proof of direct investment look to the wild, wild, west of stock market gambling investing, the boards of /r/wallstreet bets. During the early days of the pandemic, the popular board was filled with people working from home or furloughed, investing their stimulus and savings into the stock market. Hoping to make it big while the world around them was aflame. Many openly bragged about taking their stimulus or unemployment benefit and “YOLO’ing” in the stock market. Other evidence of this money going into the market is record trading revenues the online brokerages experiences. This comes despite the fact fees were slashed to $0 when Robinhood took over the game. The indirect investing is a little harder to prove. but every dollar inevitably works its way through the economy and if there’s nothing to purchase in a lockdown but equities, it not impossible to believe. You, by ordering your Grubhub and tipping a few dollars might mean that driver eventually will bet on some out-of-the-money calls with it.

The other $3.7 trillion increase the S&P 500 experienced came from good old-fashioned price discovery. As stimulus money found its way into the market and people realized COVID-19 wasn’t the bubonic plague, expectations for prices started to increase. For every buyer of stock there must be a seller. As more and more people wanted to spend their stimulus money on stocks, sellers demanded higher prices for what they had held onto in the crash. Eventually a high enough price was discovered, and those expectations are what drove it. It is not like companies created $3.7T worth of plexiglass and masks over the summer

The old saying “the stock market isn’t the economy” holds even more true in this COVID recession. While Main St. has been hurting, Wall St. is hitting record highs thanks to the money printers over at the Fed. Though sure momentum and new cash, these new highs in the stock market look great. Eventually the Fed printing must end. Hopefully, it is before the day when we are all holding stock certificates and realize we have nothing left to eat.

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Categories: Stock Market, The Fed

Tags: Federal Reserve, Main Street, Wall Street