The disconnect between the stock market and the scene on the ground is just stunning. There’s an announcement about record unemployment—and simultaneously there’s a big JUMP in the Dow Jones Industrial Average. “Why?”, I ask.
I’m not an economist, but in a half-hour I put together a spreadsheet and here’s what this disconnect looks like to me.
First, the CARES Act on 3/25/2020 provided $604 billion for Americans as follows: $300 billion in stimulus checks; $260 billion in extra unemployment payments; and, $44 billion in student loan relief. www.visualcapitalist.com/...
American businesses, by comparison, appear to benefit far more in the following ways:
- The Federal Reserve bought $750 billion of corporate debt starting June 16, 2020. https://www.investopedia.com/the-fed-s-corporate-bond-portfolio-5069989#:~:text=The%20Fed%20is%20also%20buying,Corporate%20Bond%20ETF%20(LQD).
- The CARES Act provided $500 billion for large American corporations.
- The CARES Act provided $377 billion for American small businesses.
- The capitalization of US Stocks has risen dramatically. The CARES Act was signed into law 3/25/2020. The Dow Jones on that date closed at 20,704. Today’s DJIA is 27,931, a difference of 7,227. The total capitalization of US stocks on 6/30/2020 was $35.5 trillion with the DJIA at 25,813. One can make a simple calculation relating valuation to DJIA and with that, the valuation for 3/25/2020 would be $28.47 trillion and the valuation for today 8/17/2020 would be $38.41 trillion, a gain of $9.94 trillion.
Summing up the boost to American businesses:
1) $750. billion Federal Reserve buys corporate debt
2) $500. billion CARES Act for corporations
3) $377. billion CARES Act for small businesses
4) $9,940. billion Boost to stock market valuation 3/25/2020 to 8/17/2020
Total $11,540. billion boost for American Businesses.
And just to orient ourselves, the US GDP for 2019 was $21.43 trillion. So American businesses have reaped an extraordinary benefit greater than half the annual US GDP. This is a direct expenditure by government of $1.68 trillion, leveraged in the market up to the total of $11,540 billion. So businesses, stock holders, and management appear to have benefitted 19 times as much as the amount of aid provided to hurting Americans. Looks like an immense transfer of wealth to the 1%. Big celebrations there! And, with the pending foreclosures, more transfer to come.
And that’s the disconnect.
But please, someone who REALLY knows this stuff, make better sense of it for all of us. Thanks.
