What Is the Stock Market Even for Anymore?
In early March, as it became clear that the coronavirus pandemic really wasn’t a hoax but was about to upend American life, I started texting my friend Paul, an investment adviser, about the stock market. Although I worked briefly on Wall Street before succumbing to the wealth and prestige of a career in journalism, I couldn’t claim any particular financial expertise. But that didn’t stop me from burdening Paul with my predictions. On Sunday, March 8, I texted him that I thought the market was going to drop 25 to 30 percent over the next three to four months. When the S&P 500 plunged more than 7 percent the next morning, triggering an automatic halt in trading, I told Paul that I was revising my time frame to three to four hours and added, ‘‘Good luck trying to catch this falling knife.’’ The Dow Jones industrial average sank 2,000 points that Monday, the biggest one-day loss since October 2008.
The following Monday, with the news growing more ominous, I sent Paul an updated prediction: The Dow was heading to 15,000. I was just spitballing, but given that the market fell almost 90 percent following the 1929 crash, a 50 percent decline now seemed plausible. Several days later, the Dow dipped below 20,000. Feeling oracular, I revised my outlook again: I told Paul 10,000 was my new target. ‘‘Well, that was uplifting,’’ he replied. The market dropped another 1,338 points the next day, and though my funds were tanking along with almost everyone else’s, I found some empty satisfaction, at least, in my prognosticating.
Then the market began to rise. I was dismissive. ‘‘How are you enjoying the sucker’s rally?’’ I asked Paul. My skepticism only grew when I saw Jim Cramer — yeah, he’s still around — on CNBC saying that bears like me were ‘‘betting against science’’ and basically selling the country short, a comment that called to mind Otter’s ‘‘student court’’ peroration in ‘‘Animal House.’’ By then, however, stocks had climbed 3,000 points in about a week. The market now seemed impervious to bad news while surging on even the flimsiest pretext, and my mood had turned bitterly sarcastic. ‘‘5.5 million first-time jobless claims expected tomorrow. So limit up on the open?’’ I texted Paul on April 8. The next morning, the Labor Department announced that 6.6 million new claims had been filed. The Dow gained another 779 points. Paul was as puzzled as I was. ‘‘Ridiculous!!’’ he texted.
By then, the market’s rebound had become a source of morbid fascination for many. How could it be that stocks were heading higher — after a steep sell-off, of course — in the face of a global pandemic and what’s shaping up to be the worst economic downturn since the Great Depression? Wall Streeters were quick with answers: The Federal Reserve was pumping more than $1 trillion into the markets to stave off a financial meltdown, and besides, with bond yields at record lows, investors didn’t really have any palatable alternatives to stocks as places to put their money. Still, it was jarring, even macabre, to watch the market soar while tens of thousands of Americans were dying of Covid-19 and millions were losing their jobs as a consequence of the nation’s economic shutdown.
In the years since the Great Recession, Silicon Valley had eclipsed Wall Street as an object of public ire. But with the market’s unseemly rise, investment banks and hedge funds appear determined to become the villains of this crisis, too. While tech giants like Amazon, Apple and Google have been helping to make life under lockdown somewhat more bearable — and going some way to redeem Silicon Valley’s image — the stock market’s shocking resilience (at least so far) has looked an awful lot like indifference to the Covid-19 crisis and the economic calamity it has brought about. The optics, as they say, are terrible. And they can’t help inviting a broader discussion about the market’s role in American life.
Even before the coronavirus struck, there were some trends that called into doubt how well the market was facilitating economic growth. The number of publicly traded U.S. companies has been in sharp decline for years, for instance, and financial legerdemain played an outsize part in the vaunted bull market that took the Dow to almost 30,000 in February. The run-up in stock prices clearly didn’t mirror the fortunes of most Americans, a fact laid bare by Covid-19. But it did greatly increase the fortunes of wealthy Americans, who have by far the largest stake in the stock market. They also happen to be the people best positioned to ride out this crisis, which raises a question: Is the market detached from reality, or does it simply reflect the reality of those most heavily invested in it?
Hoping to make sense of what’s been going on with the stock market these last couple of months, I reached out to Bill Ackman, a billionaire investment manager who appears to have read the market perfectly. Ackman, 54, is one of Wall Street’s more colorful figures, an activist investor renowned for both the returns he generates and the fights he has had with corporate executives as well as rival financiers. (Some people on Wall Street believe he is the inspiration for the Bobby Axelrod character on the cable series ‘‘Billions.’’) Back in March, he gave an interview on CNBC in which he implored President Trump to shut down the country for 30 days to combat the coronavirus. ‘‘Hell is coming,’’ he warned, and unless Trump ordered the country to stay at home for a month, ‘‘America will end as we know it.’’ Despite the dire message, Ackman said that he was buying stocks that morning. He was immediately accused, however, of trying to talk down the market. When he revealed a week later that his firm, Pershing Square Capital Management, had made a $2.6 billion profit on credit insurance that it purchased to guard against a steep fall in the market, critics pounced. But it seemed to me that Ackman was just doing his job, and apparently doing it well, so who cared what the critics thought?
It turned out that he did. When I spoke to Ackman in the middle of May, on a day the Dow gained another 912 points, he brought up the CNBC interview before I could even mention it. He hadn’t been on CNBC in over two years, he said, and had only ‘‘reluctantly agreed’’ to appear. He noted something that I had overlooked: The day he was interviewed, March 18, was the day the market bottomed out. ‘‘If my goal was, in fact, to push the market down, I certainly failed,’’ he said.
Photo illustration by Joan Wong
He reiterated that he was buying stocks at that point — and had been since March 12, actually. ‘‘I did not go on TV trying to mislead the public that the world was ending while I was short the market,’’ he said. ‘‘We were massively, massively long the market. And I was $3.3 billion more long on March 18 than I was on March 12.’’
But why, with the coronavirus bearing down on the country, had he turned so bullish that week? He told me he had become confident the country would do what was needed to combat the pandemic. ‘‘I said, We’re at a fork in the road. One leads to death and oblivion, and the other leads to long-term health and happiness. We’re going to take the right path, and the way we get there is a little short-term pain, which is a shutdown of the country,’’ is how he explained it. ‘‘That was the bet I was making.’’ He emphasized that he was not being cavalier about the cost of a shutdown: Some of Pershing Square’s biggest clients, he told me, were pension funds for teachers and emergency medical workers — people who were going to be among those hit hard by the crisis. (He also mentioned that his foundation had donated millions to coronavirus relief efforts and research.)
But even with most of the country shut down, almost 100,000 Americans were now dead, and some 38 million were out of work. So why was the stock market going up? Ackman said that the market was heavily weighted to a small number of companies — Amazon, Apple, Google, Facebook — that were positioned to become even more dominant than they were before the crisis and whose stock prices were rising in anticipation of that. Weak public companies were being culled — ‘‘the virus kills older people, people with comorbidities, people with other health issues, and the same thing is true in business; the virus kills off companies that were structurally impaired already’’ — while strong ones were poised not just to survive but to prosper. ‘‘The impact of the crisis on companies like Amazon is actually a little bit of short-term negative because they’re spending a lot of money managing through this, but it’s long-term hugely beneficial to the company.’’ In that sense, Ackman said, the market ‘‘doesn’t seem wrong to me.’’
It was a surprisingly tepid endorsement coming from someone who had made a lot of money in this market, and when I thought about it later, I couldn’t help wondering if it reflected either a sense that the recent gains were tenuous or an awareness that the rally had offended a lot of people.
But Jeremy Siegel had no doubts or qualms about the market’s behavior. Siegel, who is 74 and teaches finance at the University of Pennsylvania’s Wharton School, is a prominent scholar of the markets, a fixture on CNBC who is often referred to as ‘‘the wizard of Wharton.’’ He is famed for his bullishness: His 1994 book, ‘‘Stocks for the Long Run,’’ which argued that stocks were the best option for buy-and-hold investors, presaged — and some say helped spark — the 1995-2000 bull market during which the S&P 500 more than tripled in value. He and I spoke the morning after the Labor Department reported that the United States lost 20.5 million jobs in April and that the jobless rate had spiked to 14.7 percent. The Dow, true to recent form, jumped 455 points that day.
For Siegel, there was nothing strange about the market’s rising despite the gruesome unemployment figures: Investors already knew they would be ugly. ‘‘It’s Principle 1 of Finance 101: Anything that is expected doesn’t move the market,’’ he told me. People who were dismayed by its upswing since mid-March didn’t understand how the market works. ‘‘Over 90 percent of the value of stocks is dependent on earnings more than a year in the future,’’ he said. ‘‘The market is very forward-looking.’’ Investors weren’t thinking six months ahead; they were thinking a year or two ahead, Siegel said, by which point the virus would probably have been brought under control. ‘‘We’ll have a U-shaped recovery, not a V, but the market is looking at the upper part of the U,’’ Siegel said.
He then pointed out that people confused by the market’s recovery were overlooking something else: The sector of the economy being hit hardest by the crisis, the small-business community, was not represented in major stock indexes like the Dow and the S&P 500. The market tracked the fortunes of big companies, not mom-and-pop shops.
From a societal standpoint, Siegel said, the carnage on Main Street was terrible. He mentioned that he lived in Center City, Philadelphia. ‘‘It’s depressing to me — I walk by all the shuttered shops that made the neighborhood the neighborhood. I mean, there is something that is going to be lost.’’ But the stock market was unmoved by sentimentality, and the closure of a corner coffee shop meant one less competitor for Starbucks.
Siegel went on to say that in contrast to the Great Recession, which was arguably touched off by a housing bubble, this crisis was not a result of excesses built up in the economy. Rather, it was caused by an ‘‘exogenous shock’’ that hit an economy that was on otherwise solid footing. He said investors were anticipating that the economy would resume its upward trajectory once the virus was under control. ‘‘We had a very vibrant, very good economy beforehand,’’ he said, ‘‘and they’re saying that we can return to that in a couple of years.’’
I mentioned an interview that he did with MarketBrief in January, in which he said the Dow could reach 40,000 within five years. I asked if he was sticking by his prediction.
‘‘Yes, it’s still possible,’’ he said, though he allowed that the severity of the economic downturn would possibly slow the market’s ascent. ‘‘This set it back maybe two or three years.’’
The floor of the New York Stock Exchange is still considered a symbol of American capitalism, a shrine to its vitality and ingenuity. Its actual significance is greatly diminished these days, however, and not just because most trading is now done electronically. A primary function of the stock market is supposed to be the allocation of capital to help companies grow. Yet fewer and fewer companies seem to want the market’s help. In 1997, there were roughly 7,500 publicly traded companies in the United States. That number has since fallen by half, to around 3,600 — a startling trend when you consider that the economy has more than doubled in size over the same period. How is it that the stock market lost so many listed companies at a time when the economy was growing so much larger, and where have they all gone? Some are no longer in business, while more than a few have been swallowed up through mergers or acquisitions. Lately, though, the decline has been driven by the growing allure and financial muscle of private equity and venture capital. Private equity is now a $5 trillion market, having increased threefold over the last two decades, according to a Milken Institute study, and there are now nearly 8,000 private-equity-owned companies in the United States, quintuple the number at the start of the 2000s.
The appeal of private capital is obvious: Firms can obtain the funding they need without having to meet what they see as the onerous regulatory requirements of the public equity markets or having to answer to pesky Wall Street analysts. A few years ago, Elon Musk gave voice to this sentiment when he announced via Twitter that he was taking Tesla private (he reversed course, but that didn’t stop the Securities and Exchange Commission from suing him for misleading investors, a case he settled for $20 million). These days, many promising companies are bypassing the public equity markets as money continues to pour into the private market from institutional investors and wealthy individuals seeking higher returns. An Ernst & Young study from last year claimed that the public-to-private trend represents ‘‘one of the most profound shifts in the capital markets since the 19th century.’’
So, if companies are increasingly meeting their financing needs elsewhere, it seems fair to ask what exactly the point of the stock market is these days. The growth 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 market is now little more than a glorified casino. Some observers, though, contend that it actually serves a more nefarious purpose — that the market, instead of directing capital to its most productive uses, has essentially become a mechanism for draining capital out of the economy in order to funnel ever more of the nation’s wealth upward. This is being done, goes the argument, primarily through stock buybacks — companies repurchasing their own shares.
That’s not a new argument. The financial journalist Doug Henwood made the same case in his 1997 book, ‘‘Wall Street: How It Works and for Whom,’’ which offered a lucid and meticulously detailed critique of what he called ‘‘stock-market-centered capitalism.’’ Henwood’s main contention was that the actual purpose of the market was not to distribute capital efficiently but rather to make the rich richer — to ‘‘maximize the wealth and power of the most privileged group of people in the world, the creditor-rentier class,’’ as he put it. At a time when the dot-com boom was driving Wall Street to record highs and the Dow was becoming a national obsession, Henwood’s book was almost a form of dissident literature — and the fact that he was a self-declared Marxist added to its subversive edge.
Henwood highlighted the role of stock buybacks, through which companies reduce the number of available shares on the market in order to raise the price. This practice was effectively banned after the 1929 crash because regulators saw it as a form of stock manipulation. But that restriction was lifted in 1982 as part of the financial deregulation that started under the Reagan administration. During the 1980s and ’90s, as ‘‘shareholder value’’ — the idea that a company’s primary obligation is to generate returns for its owners — became a mantra of American business and executive compensation was increasingly linked to a firm’s stock price, buybacks surged. Henwood noted that between 1984 and 1997, U.S. corporations repurchased $864 billion worth of their own shares.
Now consider this: Yardeni Research reports that in 2019 alone, U.S. companies in the S&P 500 bought back $728.7 billion of their own stocks, which is equivalent to 3 percent of the country’s G.D.P. Not only that: According to Goldman Sachs, buybacks constituted the single-largest source of demand in the stock market, which was also the case in two of the previous three years. This was a period in which the stock market gained around 65 percent. To the extent that buybacks helped fuel the run-up, it suggests that the market was really just a hall of mirrors.
The defense of buybacks — and the practice has plenty of defenders, including Warren Buffett — is that if a firm can’t find productive uses for all the profit it has earned, it is obliged to give the surplus to its investors, who can then put the money into the economy in other ways. Jeremy Siegel told me that buybacks are ‘‘totally misunderstood. They get a bad rap.’’ He said that companies ‘‘invest their profits when it is profitable to invest’’ and return the money they can’t spend to shareholders, either through dividends or buybacks — and because buybacks offer a tax advantage over dividends, they have become the preferred means of distributing excess profits.
Whatever the reason, some estimates indicate that between buybacks and dividends, the largest U.S. companies returned roughly 90 percent of their earnings to shareholders in the last decade. That’s money that could have been used to give employees a raise, or to increase spending on research and development, or to cushion a future downturn, but instead it went to investors. And when you consider how generally modest economic growth has been in recent years (despite President Trump’s boasts to the contrary) and the country’s anemic productivity growth, the buyback binge seems even harder to justify.
Nick Hanauer, a Seattle venture capitalist who was one of the original investors in Amazon, has become a fierce critic of buybacks. When we spoke recently, he recalled serving on several corporate boards and being asked to approve stock buybacks. At the time, he thought they were ‘‘isolated acts of desperation and stupidity,’’ as he put it. He was stunned when he discovered how prevalent the practice was. In Hanauer’s view, buybacks are just a form of looting and represent ‘‘one of the biggest grifts in contemporary economic life.’’ He said the reason companies had so little need to reinvest their profits was that four decades of what he called ‘‘wage suppression’’ has been a check on consumer demand. ‘‘The less you pay people, the less they buy, the less average demand there is in the economy and the less reason you have to invest in increased productive capacity,’’ he said.
Even including 401(k)’s and individual retirement accounts, only 55 percent of Americans are investors in the market, according to Gallup, down from 62 percent in the early-to-mid 2000s — and not surprisingly, stock ownership has become even more concentrated in the hands of the affluent during this period. The New York University economist Edward Wolff has pointed out that as of 2016, the wealthiest 10 percent of Americans owned, in dollar terms, 84 percent of the total stock held by U.S. households. And it seems likely that as a result of the current crisis, even fewer Americans will have money to invest, and the rich will end up with an even larger share of the market.
But that’s just one more thing the market has brushed aside since mid-March. It’s possible that stocks will tumble again. Some of the biggest names on Wall Street, like Stanley Drucken-miller and David Tepper, have suggested that the market is overvalued, and their skepticism might sober up other investors. Or it could be that the market is simply telling us something we intuitively know: that the strong will emerge from the current crisis even stronger and the rich will grow even richer. Amazon’s share price is up 45 percent since the market bottomed out on March 18 and just reached an all-time high. According to a new study, Jeff Bezos has added another $34.6 billion to his net worth.
Perhaps one lesson this crisis can reinforce is that we should stop thinking of the stock market as a barometer of national prosperity. Maybe it served that function in the past, but it doesn’t now. Instead, the market has become an emblem and engine of American inequality. In that sense, its performance in recent months reflects our reality all too well.
Michael Steinberger is a regular contributor for the magazine. His last feature was about the Democratic presidential candidate Joe Biden.