The Price Of Wheat Doesn’t Tell Us About The Strength Of The Economy And Neither Does The Stock Market: Why Is This So Hard For Intellectual Types To Understand?

The stock market tells us about the expected value of future after-tax corporate profits. At least, that is when it tells us anything at all.

That is not radical lefty ranting, that is from the Econ textbook. If the economy is expected to boom next year, because Joe Biden is going to use the revenue from a big corporate profits tax to finance huge investment in green projects, there is no reason to expect the stock market to rise. People will not pay more money for shares of Microsoft (MSFT), GE (GE), or any other stock because they expect the economy to boom. They will pay more money for shares of the stock in these companies if they expect their after-tax profits to be higher. And if Biden’s tax increase on profits is going to more than offset any plausible increase in profits due to higher sales, then share prices will fall.

Read that again, if it is too simple to understand. If the economy booms, but the after-tax profits fall because of higher corporate taxes (or higher wages) the stock market will fall. (This is when the market reflects fundamental values. Often it doesn’t, as in the late 1990s stock bubble.) There is no, as in zero, necessary connection between stock prices and the health of the economy. They do often move together, just like the price of wheat tends to rise with a strong economy, but the stock market is not designed to tell us about the economy. It tells us about after-tax corporate profits: Full Stop.

The reason for this tirade is a NYT column by Farhad Manjoo in which he breaks the news that the stock market no longer tells us about the health of the economy in reference to the GameStop (GME) nonsense.

“Indeed, a story that was almost proudly disconnected from the real world, telling us so little about the larger economic forces shaping our lives?

“I’m not just talking about GameStop’s bubbly stock price. I’m talking about the entire bubbly stock market, whose gyrations during the last few decades have made it less and less of a reliable proxy for understanding the health of the economy at large — even if presidents and pundits still point to it as a benchmark that makes a difference in people’s lives.”

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