WHY RECORD NUMBERS OUT OF WORK, BUT RECORD HIGHS IN THE STOCK MARKET

Trump supporters point to the SNP 500 index setting new highs day after day. On August 28, it set a record high of 3500. Yet everyone knows the economy is in its most unpredictable state in decades — if not ever. The smart money should be fleeing to safe bonds.

Stock indexes like the SNP 500 are believed to accurately predict the state of the stock market based on inferences from the average worth of corporations from a sample, which in turn should be a reliable indicator of the state of the economy. But the present index appears to be completely unrelated to the economy. The index is going up while the economy is clearly going down.

So, how come the high S&P index? This is just another story that proves that old adage that statistics can sometimes fall a little further than damned lies along the line of deception.

This apparent record stock rally is due to a quirk in the S&P formula that determines the index. It is not a simple average but a weighted average. It is called a weighted formula because it gives more weight to certain companies than others. The bigger the company, the more weight it has — and hence has more impact on the final index number.

So you can imagine that the obscenely dramatic and well publicised ascent of a stock like Amazon could have too much impact and cancel out the down turn of any number of stagnant companies. In fact that is happening. Six companies that are benefiting from the Covert crisis are pushing the index up, covering the drop in prices of other stocks as knowledgeable investors flee to safety.

Pam Martins of Wall Street on Parade gives us this summary of the magnificent up ticks on these six blessed stocks:

• Amazon closed the trading day on January 2, 2020, the first trading day of the year, at 1898.01. On Wednesday, August 26, it closed at 3,441.85 — an increase of 81 percent in less than 8 months.

• On January 2, 2020, Apple closed the trading day at 300.35. On Wednesday, August 26, Apple closed at 506.09 — an increase of 68.5 percent.

• Netflix, the streaming entertainment service, closed at $329.81 on January 2. It had spiked to $547.53 at the closing bell on August 26 — an increase of 66 percent.

• In the same time span, Facebook soared from $209.78 to $303.91 — a gain of 45 percent.

• Microsoft went from $160.62 to $221.15 — a gain of 38 percent,

• While Alphabet, parent of Google, lagged the other five stocks with a gain of just 17 percent.

The Flawed Formula

The S&P staff take the value of a company’s share (say Apple at $148.26 in November, 2019) and multiply it by the available stock (4,801,598.00) to calculate the company’s market capitalization at $711.9bn. That is divided by the total market capitalization of all the 500 on the index (Yes, I know there are 505) to give it its weight. The larger this number the more it will affect the index. As these super stocks soar, they pull the index skyward.

That weighting may be reliable in normal times but not in extreme economic conditions.

Since 2018, investment advisors, such as Darryl & King, began raising concerns that the S&P 500 was not reliable given the bias in the formula. They suggested that the tech crash in the 90s went undetected because of this reliance on a weighted average formula.

For the end of 2017, Darryl & King calculated that because of the weighting, Apple’s stock affected performance by 19.5 times compared to a simple averaging formula.

The Smart Money is Leaving

Refinitiv Lipper, the financial services firm collects data on the purchase and sale of shares and bonds. For the month of August its report shows significant outflows of equity and inflows of bonds indicating that sophisticated investors are, in fact, fleeing to safety because they believe the stock market is no longer a good investment.

Can the blessed six continue to keep the stock indexes high until the November election? In the same article quoted above, Pam Martins discloses that the stock brokers are doing their best to promote these stocks to keep the distortion continuing. These 6 are on their buy recommend. It serves their interest to keep Trump in office.

What chance is there that the working class Trump loyalists will understand that the state of the economy is fake news.

Acknowledgement: Thanks to retired banker and senior Oped News editor David Pears for reviewing this piece.

The title image is from Pexels.

The figures re Apple 2019 stock prices were taken from Investopedia.

Jan D. Weir is a lawyer who has advised international corporations, banks and accounting firms. He has taught business law at the University of Toronto, and is the co-author of The Essential Concepts of Canadian Business Law. Follow him for updates on laws that affect inequality @JanWeirLaw and at and Medium.com.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store