The Stock Market is Stupid.
I’m going to be honest, I have been thinking about this topic for a long time.
Now that a significant number of Americans are working from home, I have several of my friends informing me that they just invested in the stock market. I have people explaining to me that they aren’t too worried about the economy because the stock market seems to be doing just fine.
Why do we place such emphasis on the stock market? Why do we associate the stock market with the state of the economy, when in fact the stock market actually represents investor confidence about a company’s future profitability? The trading floor no longer symbolizes the state of the economy as it once did, nor should it.
Since the start of the 2020 Covid-19 pandemic, waves of Americans opened up investment accounts in order to wade into the stock market. At the same time however, hundreds of public companies canceled their 2020 earnings guidance. The result? No one is able to predict the future of the stock market, and new investors are placing their bets on companies who make headlines without showing any real data. These amateur investors suddenly have the power to decide the value of a company based on how much they would be willing to spend in order to gain a fraction of nominal ownership of that company.
The stock market is as arbitrary as the currents of an ocean, infinitely changing direction to submit to the will of the winds.
Not only does the stock market consist of amateur investors essentially taking part in a higher form of gambling, it does not even come close to approximating the state of the economy. One fateful morning in the spring of 2020, the Labor Department announced the filing of almost 7 million new unemployment claims. The same morning, the Dow gained almost 800 points.
How could it be that stocks were climbing in the face of the worst economic downturn since the Great Depression?
The truth? The Federal Reserve was busy pumping over $1 trillion into the stock markets in an effort to forestall a financial collapse. While food bank lines stretched for miles and millions of Americans lost their health insurance, our Federal Reserve acted to prop up industries that should have gone bankrupt instead of helping the actual suffering Americans.
What’s more infuriating about this situation is that our own members of Congress are contributing to the fake buoyancy of the stock market by profiting from using information that the public doesn’t have. Several members of Congress have been caught investing in companies such as Zoom and selling millions of dollars worth of stock from hotels and airlines right before the public lockdowns. However, even if members of Congress weren’t increasing their wealth by using information that the public doesn’t have access to, there would remain a blatant problem: Over half of our Congress is made up of millionaires whose wealth is still tied to this awful institution, the stock market.
Even Adam Smith, the father of capitalism, would be horrified by a visit to a trading floor. While he did understand that only a strong state could provide the legal, social, and economic infrastructure necessary for a flourishing market economy, that strong state would only be tolerable in an environment of pluralism and democracy sustained by wide mutual trust. And Smith identified many of the ways in which markets go wrong — one of which would be through crony capitalism.
This theme pops up repeatedly when we look at the history of the stock market. Most recently, we can look to the GameStop/Robinhood fiasco to show us how incompetent the stock market, and those who control it, really are. When amateur investors began buying millions of dollars worth of GameStop stock on the Robinhood trading application, Wall Street investors lost millions because they were unable to ‘short’ these stocks. In response, the Robinhood application — which prides itself on providing access to the stock market for the everyday American — prevented its users from buying any more of GameStop stock to protect Wall Street. A company that is supposed to be for the people turned against its own users to protect ‘crony capitalism’.
This fiasco only serves to further emphasize the point that the stock market is becoming increasingly disconnected from the actual economy and the people in the United States. It’s honestly astonishing to think about how we didn’t abolish the stock market back in the aftermath of the 2008 crash. The 2008 crash was caused by a handful of companies making risky investments which decimated the American economy, led to millions of layoffs, and induced financial crises for Americans who never even stepped close to these investments.
Again, allowing gamblers to have such power over your livelihood only seems like it would end badly.
Nowadays, the momentum of high-frequency trading, in which players dart in and out of the market seeking to profit from the tiniest price discrepancies, certainly lends credence to the idea that the stock market is now little more than a glorified casino. I would, however, argue that it actually serves a more nefarious purpose — that the market, instead of directing capital to more productive uses, has essentially become an apparatus for draining capital out of the economy in order to funnel more of the nation’s wealth ever upward.
A primary objective of the stock market is supposed to be the allocation of capital to support the growth of companies. The problem is that shareholders care more about the profitability of a share rather than the net profit margin of the company itself. And so, the value of a share is derived from the conviction that shares will unceasingly rise, rather than the actual overall profit of the company. This allows companies like Amazon, to bankrupt thousands of smaller companies while operating for over a decade without netting more than a dollar in profits from sales.
Simply because investors cling to the promise of rising Amazon shares. It’s basically a self-fulling cycle.
This leads me back to my initial point — the stock market is stupid. To reiterate, the stock market is run by professional gamblers, it fails to fulfill some of its most important functions, and works only to put more money into already overflowing pockets. While it may take time to actually consider abolishing the stock market (and there are definitely valid points against doing so) we should nevertheless focus on extricating our perception of the state of the economy from the condition of the stock market. This pandemic has at least shown us, if anything, that even if the value of the markets is skyrocketing, it does not correspond with the average American thriving.
In fact, it may very well be the opposite.