Markets Are Rich. Are We?
Why record stock indices tell us much less about economic prosperity than financial television, politicians and investors sometimes suggest
There is perhaps no economic headline more seductive than this:
“The stock market reaches a new all-time high.”
The message seems obvious.
Markets are rising.
Companies must be doing well.
The economy must therefore be doing well.
And if the economy is doing well, people must be doing well.
Unfortunately, those are four different statements.
They sometimes move together.
Sometimes they do not.
And understanding the difference has become increasingly important because financial markets have grown enormously relative to the underlying economies they supposedly represent.
A stock index is not a country
The S&P 500 does not measure American living standards.
The DAX does not measure German household prosperity.
The FTSE 100 does not measure how comfortably the median British family lives.
An equity index measures the market value of a selected group of listed corporations.
Those corporations can operate globally.
They can increase profits while domestic wages stagnate.
They can automate jobs.
They can reduce headcount.
They can earn revenue abroad while their domestic economy struggles.
And their share prices can increase because investors expect higher profits years into the future.
There is nothing wrong with this.
That is what an equity market is supposed to do.
The mistake begins when we transform the market into a referendum on society.
The equation that does not exist
Stock market ↑ does not automatically mean:
real wages ↑
median disposable income ↑
purchasing power ↑
housing affordability ↑
social mobility ↑
household financial security ↑
The distinction sounds elementary.
Yet public economic debate repeatedly forgets it.