Bull Market Blues Stock Prices Don't Say Much about Economic Conditions

By Krugman, Paul | Pittsburgh Post-Gazette (Pittsburgh, PA), July 16, 2016 | Go to article overview

Bull Market Blues Stock Prices Don't Say Much about Economic Conditions


Krugman, Paul, Pittsburgh Post-Gazette (Pittsburgh, PA)


Like most economists, I don't usually have much to say about stocks. Stocks are even more susceptible than other markets to popular delusions and the madness of crowds, and stock prices generally have little to do with the state of the economy or its future prospects. As economist Paul Samuelson put it, "Wall Street indexes predicted nine out of the last five recessions."

Still, the fact that the major averages have lately been hitting new highs is noteworthy. What are they telling us?

The answer isn't entirely positive. In some ways the stock market gains reflect economic weaknesses, not strengths.

But let's start with the myth Mr. Samuelson was debunking, the claim that stock prices measure the economy as a whole. That myth used to be popular on the political right, with prominent conservative economists publishing articles with titles like "Obama's Radicalism IsKilling the Dow."

Of course, we heard little of that line once stock prices turned around and began their huge surge - which started just six weeks after President Barack Obama was inaugurated. (Polling suggests that most self-identified Republicans nevertheless believe that stocks have gone down in the Obama era.)

The truth is that there are three big points of slippage between stock prices and the success of the economy. First, stock prices reflect profits, not overall incomes. Second, they also reflect the availability of other investment opportunities - or the lack thereof. Third, the relationship between stock prices and investment that expands the economy's capacity has grown tenuous.

On the first point: We measure the economy's success by the extent to which it generates rising incomes for the population. But stocks reflect only the part of income that shows up as profits. And the share of profits in overall income is not stable. It fluctuates. It has been a lot higher in recent years than it was during the great stock surge of the late 1990s - that is, we've had a profits boom without a comparably large economic boom, making the relationship between profits and prosperity weak at best. …

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