Effects of COVID-19 on the American economy
In the past couple of months, the American economy has experienced an economic recession owing to the current Covid-19 pandemic, with unemployment numbers increasing significantly. However, the stock market continues to match higher. How can the divergence between the performance of the stock market and the real economy be explained? The primary reason explained in the video is that the stock market has been buoyed by optimism from investors concerning the economy in the future. Despite the current pandemic and the social unrest that has plagued America following the death of George Floyd, investors are positive and optimistic that the economy will perform better in the future.
Experts in the video explain that the stock market is not the economy. Investors are looking beyond the current circumstances towards what they believe will occur in the future. While the economy is more concerned about today, the stock market looks at what will happen in the future. The forward-looking nature of the stock market explains the recent surges in the market compared to the economy. Many investors have become optimistic that the phased reopenings of states and the economy would spur economic activity. Unemployment and low wages may have also buoyed the stock market. Uber’s laying off of 3000 staff explains this phenomenon. Joseph Stiglitz explains that when wages are low, profits are high, and the stock market responds positively. However, the economy does not respond well to low wages because spending is reduced.
The government stimulus package may have also buoyed investors. Some people have used the funds to buy stocks, and the Federal Reserve’s low-interest rates have also allowed people to borrow more money. The low-interest rates explain the high prices of the stock market. Big companies like Facebook, Amazon, Alphabet, Apple, and Microsoft have had their stocks rally big time, hence boosting other markets. And some companies like Zoom have benefited from the stay at home orders.
I have learned two interesting facts from the video about how unemployment and low wages can increase stock market prices. While some people suffer because of low salaries, stock markets perform better because profits are high. The other fact is how investors can stay positive despite the warnings of the second wave of coronavirus infections. I think that the second wave of infections and failure to pass more government stimulus measures may diminish investor confidence.