Why Are Stocks Up? What Does It Mean?
Mr. Powell I don't feel so good
(I’m Henry Snow, and you’re reading Another Way.)
Last week, the stock market reacted to bad new unemployment numbers from the Bureau of Labor Statistics with joy. Nearly one million fewer people have jobs, according to the latest revisions, than we thought. This should raise alarm bells across the economy: that’s one million fewer people fully contributing to the economy, as workers and as spenders. Prices are supposed to reflect available information about the world– this is part of the way capitalists have long justified not just capitalism in general, but powerful world-altering financial markets in particular. Yet somehow bad news is good news. Stocks went up. They’re still doing that; financial news outlets today have a flurry of “why are stocks still going up” headlines available for your reading pleasure.
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The short term answer (why stocks are up today rather than why the economy is acting this way in general) involves the Federal Reserve. America’s central bank uses a number of levers on bank lending (among other things) to manipulate interest rates across the economy. You can think of this as making money easier or harder to get. When rates go up, it becomes harder to buy a house or a car; when they go down, it’s easier.
Bankers are endowed with this enormous and terrifying power in the name of macroeconomic stability, and the Fed is specifically supposed to limit both inflation and unemployment. This is a careful balance, and one that they have often (in my view) gotten wrong. A “hotter” economy with higher employment also usually comes with inflation– more people spending more money means prices go up. Fed decisions can tip the economy into an overheated state of high spending, ramping up inflation, or strangle growth, protecting current prices by sacrificing American jobs.
That’s why we have– or had– “central bank independence,” the idea that the government cannot directly influence Fed decisions. If Joe Biden had forced Powell to mess with interest rates, he could manipulate the economy for short-term electoral gain– lower inflation or higher unemployment– at the cost of serious long-term harm. This is the current risk with Trump’s meddling at the Fed. He clearly aims to force the Fed to lower rates– he has effectively admitted this– up to and including firing Lisa Cook from the Board of Governors under false pretenses. I don’t love a bunch of appointed bankers controlling our economy. But they are definitely better than a President who in his earlier business career couldn’t even make a casino profitable.
I want to preface any further analysis here with an admission: I was wrong about Jerome Powell (chair of the Fed) and the Federal Reserve during Biden’s term. On social media and probably in some newsletter posts here, I argued– like some economists!-- that the Fed was keeping interest rates too high for too long. There were real reasons to believe this. Raising rates can worsen inflation instead of or in addition to improving it: higher rates mean free money to, for example, bond holders. More broadly, interest rates alone are an imprecise and broad tool. It’s not fair that prices are kept down by crushing consumer spending or employment– my life, and probably yours, is harder because of decisions the Fed made.
But the Federal Reserve isn’t God. I can think of half a dozen other things the US government could have done to combat inflation, including strategic price controls, tax increases, spending cuts in targeted areas, and government grocery stores. Unfortunately, Congress and the President did not do this, and increasingly in 21st-century America seem unwilling to do anything at all. The Fed has a hammer. It’s not Powell’s fault that the guys with the screwdriver seem unwilling to do anything, and if whacking away at a screw is the only way to get it in, well, he’s gotta whack away.
Empirically, Powell seems to have done well. We spent a massive amount of money during COVID, had a brief period of inflation, and were on track at the beginning of the year toward the much-vaunted “soft landing”-- slowing spending without stopping it, so as to keep inflation down and keep the economy growing. I can’t say whether an alternate Fed policy would have worked better, not just because I’m not an economist (though it’s important not to go over one’s disciplinary skis, and I confess this is an area I’ve been at risk of doing so) but because counterfactuals are hard.
My second critique of the Fed was that it is fundamentally anti-democratic. Why should a few appointed bankers have a “recession” button they can push whenever they want? Who keeps an eye on them? It’s not fair that they can make decisions we can barely respond to. All of this is true. But direct control by the executive here would be nightmarish: whether elected or not, the already-imperial President of the United States should not have the unilateral power to manipulate the US and world economy. We have had bad Fed chairs, like Nixon’s Arthur Burns. But I’ll take the mistakes Burns made over direct control by Nixon– indeed, the possibility that Nixon successfully pressured Burns is one of the big criticisms of Burns’s tenure.
Like other executive powers, power over money is best handled by independent civil servants. Are there ways to make them more accountable to the people? Sure. In the long term I would prefer us to rethink money, monetary policy, and the economy altogether. We should be thinking about that right now. But it will be harder to build a better world if the existing one implodes. We’re in a crisis, and “rethink the federal reserve” is something you do when you have power, not when you are in a desperate struggle with an authoritarian regime.
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Back to today’s economy. The stock market only exists because we allow it to: from mountains of complicated regulation to basic rules like the existence of private property, our government’s will is the only reason financial markets can exist. In America that government is supposedly democratic, and even in countries that aren’t, like China, markets have to serve some collective good if those in power want to survive more than a few years. Financial markets can theoretically serve a number of functions for the public, and two are worth mentioning here.
First, wealth-sharing. Markets don’t really redistribute wealth– in fact they do the opposite. The ability to make money with your money helps those who already have money. But it does spread benefits. Private companies like Charles Koch’s Koch Industries funnel unaccountable wealth and power to their owners. Public companies benefit pension funds, ordinary investors, and other firms.
Second, financial markets enable investment. Businesses can sell parts of themselves (equity) to raise money that they can use to grow. There is no uncontested way to measure how valuable a business is, or will be. As they do elsewhere, markets let us take subjective situations and resolve them into a useful but dangerous objective value: what people are actually willing to pay. Proponents argue this is better than, say, having the government decide who gets investments, in the same way that “free markets” are better than “central planning” (a false dichotomy, but that’s an issue for another day).
The stock market now seems to be failing at both of these goals. Let’s look at an example company here. If you had a crystal ball at the beginning of the year, one firm it would tell you to invest in would be Hims and Hers Health, Inc. You may not have seen their ads, and if you haven’t you’re lucky (some of us don’t pay for premium Hulu– I put your dollars to better use, paid subscribers!). Hims/Hers is a fake company that should not exist. It sells medications including erectile dysfunction drugs, birth control, and generic/compounded Ozempic. All of which are very helpful to people! But it does not produce any of these drugs.
Rather it takes advantage of inefficiences elsewhere: some medications are hard to get, waits for doctors are long. Hims and Hers is a middleman that you pay to cut the line. They’re called that because they prey on gendered anxieties: you might wait a bit longer to see a doctor, but can you afford to wait when your manhood/womanhood/desirability is on the line? One ad I found while looking up details on this company advises you can “skip the awkward doctor’s visit” if you are self-conscious about ED or hair loss. How much would you pay not to have an awkward doctor’s visit?
This company is worth billions of dollars.
When I say they shouldn’t exist I’m speaking financially as well as morally. You should never take financial advice from a socialist, but where is the value here? If the situation Hims and Hers mediates improves at all– for example, if GLP-1s get cheaper, which is happening– they stand to lose massive amounts of money. They don’t do anything that someone else can’t do. Doctors control their services, pharmaceutical companies have patents, and compounding pharmacies have production capacity. Is connecting these really worth billions? Maybe. Is it worth so much that we want our economy to reward buying Hims and Hers stock a year ago with 250% gains (at the time of this writing)? I don’t think so.
Something we don’t consider often enough is the trade-off nature of investment gains. If giving Gender Anxiety Co. your money is more profitable than other things, you’ll do it– meaning that money doesn’t go somewhere else. Increasing the stock price of this company (which you do when you buy) doesn’t even, precisely, mean investing in them in the present either unless they sell more equity– it just means rewarding earlier investors. In other words, we have created an economy where it is more rational for you to give money to people who hold pieces of a bogus middleman than to, say, invest in building more homes.
All of this goes the other way too. Firms have to maximize shareholder value. If there’s something they can do that provides long-term benefit, not even to society but just to the company, they might prioritize short term share price improvements instead. Increasingly short-term investors certainly want them to, and with executives coming from an executive class that rotates between businesses rather than lifetime employees of the company who have worked their way up, CEOs are more likely to think this way independently as well.
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The sickest thing about financial markets, however, is not their short-termism but their smoke-and-mirrors nature. Even if investors correctly believe Hims & Hers, or Tesla, is overvalued, if everyone else believes it will go up forever, the rational thing in the short run is to act like everyone else and buy buy buy. I can whine all I want about how Hims and Hers is ridiculous, but if the market does not have any reason to internalize that, it doesn’t matter.
This is supposed to be the strength of markets. Capitalists have spent decades arguing that markets resolve the irresolvable. How much should a pizza cost? How on Earth would we calculate that? Market competition aggregates how much individuals are willing to pay and spits out an answer that we can use, whether or not it is “true.” Again, this is the magic of markets, and the curse: an answer produced by nobody means no one is accountable, and you can end up in situations where one of the most rational places to invest your money is doctor’s visit anxiety arbitrage.
Theoretically financial markets rely on collective accountability: a bad bet will lose me money and hopefully cause me to modify my behavior. But right now, investors either don’t care about the health of the broader economy or assume Uncle Sam will save them. The classic libertarian argument against bailouts– let companies fail so they can learn– is wrong, but it sure is tempting sometimes. Forget banks, the entire economy has become too big to fail. Individual firms can still screw up, but only in an isolated way. If you make a mistake that threatens to sink the economy, you will be saved; if investors collectively make such a mistake they sure will be.
An easy prediction: with Nvidia valued at $4.32 trillion, even if investors are wrong to predict everyone will want their GPUs in increasing numbers, we cannot afford to let them suffer the consequences. Too many people stand to lose. I think Nvidia is overvalued. But if it crashed I would support a bailout of some kind, because the alternative would be horrific.
While investors increasingly act as if they are insulated from reality, they very much stand to gain from falling interest rates. They can borrow even more money, and with money looser, there will be more buyers investing in (often) the same hot stocks as they are. Conventional wisdom is that you should be investing, and conventional wisdom is right, which means any improvements in ordinary people’s financial situation can increase demand and thus prices for things like Nvidia or Hims & Hers stock. The stock market runs on vibes, and lower interest rates means better vibes.
We actually have no reason to assume the Bureau of Labor Statistics numbers are real. Trump fired the BLS head for reporting data he didn’t like earlier. Conveniently, today’s downward “revision” goes through last March– including months Biden was still President. If Trump wanted to find bad economic news in order to persuade the Fed to lower rates (this is what they do when the economy slows), but also wanted to blame Bide for it, this is what he’d have the BLS say. As his press secretary herself said, “Today, the BLS released the largest downward revision on record proving that President Trump was right: Biden’s economy was a disaster and the BLS is broken.” But as financial markets become more disconnected from reality, the actual truth of BLS numbers becomes less and less significant– only the narrative and its effect on the Fed matters.
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For now. You cannot run from reality forever. “The economy” is an abstract representation of very real resources available in limited quantities– labor, materials. You can stretch reality, but you cannot abandon it: Hims & Hers may be overvalued, but if gender anxieties or Ozempic prices fall it will still be wiped out. A serious economic crisis cannot be ignored by business or the market.
…I hope. No one can predict the future, and I know motivated reasoning when I see it. For decades the left has predicted various flavors of apocalypse, and in the last few months there’s been plenty of doom discourse among anti-Trump forces. Unlike political warnings on matters like free speech– where things are getting worse more quickly than some of the most pessimistic predictions I heard or imagined– economic prophecies of catastrophe have so far missed. Predictions of empty shelves and stock market crashes have not come to pass yet. Maybe it all keeps on going.
I don’t want another crash— personally I already don’t know what I’m going to do in this economy, to be honest. The best case scenario is that we somehow limp along without a recession until the regime is defeated and, hopefully, we can produce something fairer rather than trying to merely roll the clock back a few years. But we already have an economy that rewards wild speculation, disconnection from reality, and having money, rather than hard work that meets real human needs. We are already in an economic crisis, not despite market enthusiasm, but because of it. Avoiding a crash isn’t enough— we are going to need to fix this too, together.