Stock Market Under a Lens

To be sure “the market” is an indicator (among other things), but is it an accurate indicator of the U.S. Economy as a whole? So powerful supposedly is public opinion, at least as created and magnified by our media of communication, that steep plunges of the stock market are mirrored by stern expressions on the faces of our political leaders or—and when the markets soar—it seems as if the sun had begun to shine.

But lets take a look. The market these days means the New York and the Nasdaq Stock Exchanges. These days, officially, the NYSE is NYSE Euronext, an entity created after the 2007 merger of the actual NYSE Group, Inc. with Euronext. That process genuinely fuzzed up what used to be an American entity. The new thing lists some 8,000 companies, but the American complement of that, made up of the old American Stock Exchange (Amex) and the NYSE (those two first merged before melting with Euronext) represents 2,304 U.S. companies. The Nasdaq, which is the over-the-counter stock-trading entity, lists 2,803 companies. In total, then, when we speak of “the market” we’re really talking about 5,107 companies the stocks of which are freely traded on open markets.

But what we hear about are indexes built of selected companies’ results within this family—the Dow Jones Industrial Average, the S&P 500, and (rarely) the Russell 2000. The Dow itself only represents 30 companies, thus a kind crème-de-la-crème—but it is the index we hear most about. The S&P and the Russell announce the number of companies they index in their names.

Now ponder what this means. In looking at the Dow, we have a subset of total companies openly traded—30 of 5,000! The 5,000 companies traded are a subset of 5.9 million companies with employees in the United States. Okay. That number includes small business. But there are 17,000 companies with 500 or more employees. The Dow represents 0.2 percent (that’s two tenth of one percent) of that much smaller number. Now when it comes to sample-taking, that’s a pretty small sample. That small sample is what people usually mean when they shriek about “the market.”

By contrast, when people talk about “the economy,” the reference is to the Gross Domestic Product—the sum total of all financial transactions the Bureau of Economic Analysis manages to catch for inclusion in that magical number. And when people get really angry or excited about the economy, they’re really excited about jobs.

Let’s see if we can put the whole thing in a single picture—a pie chart. In the chart that follows, the total pie is Gross Domestic Product (GDP). I divided it into three slices. One of these, the After-Tax Profits of all corporation (and that means the 5.9 million corporations, not the 5,000 traded or the 30 indexed), might stand for “the market”—not the one symbolized by traders frantically waving slips of paper but corporate activity in its essence, the making of Holy Profit. The biggest slice I’m showing is paid compensation of employees—all employees, whomever they work for. A large part of that slice is earned working for corporations, but paying wages and salaries is not rewarded by the market; wages and salaries are a cost. For this reason, whenever compensation rises or jobs start heading up–or interest rates rise—the markets panic.  Jobs and profits are inherently antagonistic one to the other. The third slice I show is Everything Else—thus all other forms of income achieved by anybody at all—by receiving a subsidy, collecting rents, getting royalties, whatever. Here is the picture.

The striking thing here, too—as earlier in contemplating how 30 companies under very bright lights make us think we’re looking at “the economy”—is that the profit slice, at a mere 4.6 percent of GDP, is a mere sliver. And most of what is in that slice is not traded on the market at all. Most of it is privately held.

Your chest, I hope, is swelling with the pleasure of seeing things in proper scale. When next you chance across one of those busy financial TV shows where young pundits are five-highing because the Dow is bullish again, you might remember this disquisition and reflect your insight by raising your eyebrows.

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