One of the more glaring lessons of the 2020 pandemic was that the economy and the stock market are not the same things, nor do they necessarily move in lockstep. They are measurements of two different aspects of the national economy, often indicating how the other will react. However, as we saw last year, the economy is a more significant indicator of how Main Street is doing, while the stock market is more a reflection of Wall Street and investing in West Palm Beach.
The day-to-day performance of major stock indices, such as the S&P 500 and the Dow Jones Industrial Average, is not usually an accurate account of what’s happening in the lives of most Americans.
Thousands of books and countless words have been written about this very topic, and it’s easy to see why – just in the last year, we saw the stock market drop, which was in line with the state of the economy on the ground. However, when the country experienced a surge in the stock market, that was not reflective of the massive job crisis the rest of America was living through.
This discrepancy is partly due to a highly concentrated share of the stock market belonging to just five stocks. Over 22% of the market cap of the entire S&P 500 index belongs to Microsoft Corp, Apple Inc., Amazon, Alphabet, and Facebook. These are all internet-based companies that benefitted from vast numbers of people staying home and relying more than ever on their computers.
As a general rule, economics is more of a social science. It conveys a picture that captures the interplay between natural resources and human behavior. Finance, on the other hand, is a proactive measure. Its focus is on the tools and techniques of managing money.
Economics covers the production, consumption, and distribution of goods and services and how people interact with them — through buying, selling, or working to buy or sell them — and how they react to price changes driven by supply, demand, and inflation. It is, after all, people who drive economic activity and ultimately growth. There are two main branches of economics: macroeconomics and microeconomics.
Macroeconomics measures the overall economy through factors such as inflation, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in employment levels.
Microeconomics tracks specific factors within the economy, largely the choices made by people, households, and industries. It is a study of the incentives behind those decisions and how they affect resource use and distribution.
Finance, on the other hand, deals specifically with the use and distribution of money. As a discipline, it comprises three basic categories: public finance, corporate finance, and personal finance. Within those realms, we often talk about the difference between Main Street and Wall Street.
Main Street describes the average American investor as well as small independent businesses.
Wall Street consists of high-net-worth investors, large global corporations, and the high finance capital markets.
The Friction Between Main Street and Wall Street
There are inevitable conflicts between these two sectors. For example, government regulations are frequently designed to protect individual investors and/or small businesses, but they can be detrimental to Wall Street profitability. The opposite can also be true, where benefits for large corporations can hurt small businesses, local jobs, and small investors.
Because these markets are largely disconnected, it can be challenging to create legislative changes that benefit every sector equally. It’s not just in investment protections; it’s also in tax incentives. Increasing tax rates for profits made on the upper boundaries of the stock market could fund public improvement projects and incentive programs for “the little guy,” but not without dampening the stock market’s growth.
We hear these two terms used interchangeably all the time, though, and that’s because they often do move in the same direction. That dynamic was challenged this year when global events shook the foundations of every major economy.
While millions of Americans lost jobs and other sources of earned income, after an initial drop in the stock market, many investors saw their portfolios make ample gains. This was a good demonstration of how your money in the market could be working as another source of income. It’s another way of diversifying your assets, so that your investments can keeping earning money even if you can’t.
Finding the right sectors for investing in West Palm Beach and remaining profitable is then a matter of identifying long-term earning potential and stability. Identifying the investment opportunities that provide this kind of safety is exactly what our team here at Legacy Financial Partners is equipped to handle.
Early on, the Federal Reserve and other central banks stepped up to infuse the economy with capital, thus stemming the tide of the economic decline. While these moves helped bolster the stock market, they did not prevent the loss of hundreds of thousands of jobs or stimulate consumerism. In other words, policy and even legislative intervention may have helped Wall Street, but it didn’t do that much to encourage economic growth or job creation.
There are several causes for this phenomenon, but it truly serves to highlight the fundamental difference between investing in West Palm Beach and the sources for job creation. Ultimately, the market is speculative and often separated from the economic drivers at the individual level. Seeing the discrepancy between the stock market’s success in comparison to the hiring crisis in the wake of the pandemic is the best evidence for how separated Wall Street truly is from Main Street.
It’s impossible to predict what the future may hold. Global events can affect financial outcomes and throw a wrench in even the best-laid plans. At Legacy Financial Partners, we can help you limit your risks and remain profitable over the long haul thanks to our expert financial advice. Call us today to learn more about our services!
Content prepared by Kara Stefan Communications.
1 Clark Merrefield. Journalist Resource. Jan. 11, 2021. “The stock market is not the economy. Right? Here’s what the research says.” https://journalistsresource.org/studies/economics/stock-market-not-economy/. Accessed Feb. 4, 2021.
2 Stephen D. Simpson. Investopedia. Nov. 2, 2020. “Finance vs. Economics: What’s the Difference?” https://www.investopedia.com/articles/economics/11/difference-between-finance-and-economics.asp. Accessed Feb. 4, 2021.
3 Investopedia. Dec. 29, 2020. “Macroeconomics.” https://www.investopedia.com/terms/m/macroeconomics.asp. Accessed Feb. 4, 2021.
4 Investopedia. Nov. 2, 2020. “Microeconomics.” https://www.investopedia.com/terms/m/microeconomics.asp. Accessed Feb. 4, 2021.
5 Corporate Finance Institute. 2021. “What is Main Street vs Wall Street?” https://corporatefinanceinstitute.com/resources/knowledge/finance/main-street-vs-wall-street/. Accessed Feb. 4, 2021.
6 Shyam Sunder. Yale Insights. June 17, 2020. “Liquidity Injections May Have Driven the Stock Market Recovery.” https://insights.som.yale.edu/insights/liquidity-injections-may-have-driven-the-stock-market-recovery#gref. Accessed Feb. 15, 2021.
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