Why the Stock Market is Rising Amidst a Pandemic and Record, Racialized Inequality

by Karen Ho

Oct 12, 2020



On May 25, 2020, George Floyd was murdered in Minneapolis, his life brutally taken in what has become an all-too-routinized, state-sanctioned police ritual whereupon misplaced, racist, and stereotypical anxieties are resolved through the exercise of power over the lives (and deaths) of Black people. About two weeks later, the Washington Post reported that the socio-economic divide between Black and White household wealth was “as wide as it was in 1968.” Meanwhile, the US stock market, as measured by the Dow Jones Industrial Average (DJIA), the Standard and Poor’s (S&P) 500 Index, and the Nasdaq Composite, has been steadily climbing from its March 2020 lows, and has risen markedly throughout the summer of 2020. As of early September 2020, the Dow was barely 5% below its all-time high of 29,551 in February 2020, and the S&P 500 and Nasdaq had actually reached new all-time highs.

Two key questions thus come to mind. First, how could the stock market possibly be “up,” much less surpassing its all-time high, despite a ravaging pandemic? And second, how is it that socio-economic inequality, especially the sustained gap between Black and White people, has not budged in the intervening fifty-two years? Instead of seeing these two queries as unrelated or disconnected, it is crucial to read the rising stock market as absolutely central to understanding the persistence and widening of racialized inequality as well as the intensification of socio-economic precarity and downward mobility for most.

Of course, many social observers and commentators have also noticed these jarring juxtapositions and, in their puzzlement, have raised these prescient societal predicaments across multiple media platforms, from the business news to late night television broadcasting. In fact, on Friday, June 5, 2020, Stephen Colbert, host of “The Late Night,” brought in a key commentator on Wall Street and corporate America, the New York Times columnist Andrew Ross Sorkin, to ask precisely these questions.

Stephen Colbert and Andrew Ross Sorkin discuss the rising stock market amidst the Covid-19 pandemic (USA)

Colbert began the interview with a quandary. With so many in economic distress, in the midst of “massive unemployment,” “civil unrest,” and “shuttered businesses,” how is it possible that the stock market is rising? Before Ross answered, Colbert inserted a follow-up: “I know Wall Street isn’t the economy, but shouldn’t they pretend to have some relationship to the economy? Or else, just go down and just saw off the bottom of Manhattan and push it into the Atlantic Ocean.”

Before we get to Sorkin’s response, it is important to recognize Colbert’s confusion about the relationship between the stock market and the economy, not to mention employment, because it points to a structural issue and ongoing misrecognition. Why does the stock market not reflect most people’s experiences of the economy, especially given that stock prices (which are still, in fact, shares of existing institutions) are supposed to represent “the performance” of corporate America? To get at these conundrums, a counterintuitive response to the leftish conventional wisdom (that the stock market has nothing to do with the economy or jobs) is necessary1. So bear with me as I attempt to put the pieces of the puzzle together; making sense of the changes in the relationship between the stock market and economy is crucial to understanding increased socio-economic inequality and contemporary racialized inequality.

As I turn to Andrew Ross Sorkin’s response, hold on to the quandaries raised by the normative trope that the stock market is simply divorced from the reality of a recession, since Ross’s answer does not directly address the source of this confusion. In fact, he largely reproduces the problematic logic that the stock market is disconnected from the economy, as he does not take the opportunity to explicate the outsized influence of the stock market and how it actually does represent and measure the economy. Treading within the confines of this logic, Sorkin begins his reply as follows:

The honest answer is…there is something perverse… about the market and investors because…they are not really looking at the economy today…today is like already in the rearview mirror to them. The investment community is looking at what the world looks like…Twelve months from now, so when you see the stock market up, what the stock market is trying to do is bet or guess what the world is gonna be then, and I think what the hope is….that there is going to be a vaccine, or a therapeutic, and that unemployment doesn’t look anything like it looks like today.

To be fair, Sorkin importantly follows on with two additional points that better showcase the ways in which finance is continually buttressed and bailed out by government (through Congress, the US Treasury, the Federal Reserve, and/or international financial institutions such as the IMF). He states that the stock market is up because the federal government is printing money (by literally pressing buttons on a computer) in a frenzy, and in a crisis, Trump – seeing the stock market as the bellwether of his presidency, and replicating the precedent set by the no-holds-barred federal and taxpayer bailout of Wall Street financial institutions in 2008 – will do anything to subsidize Wall Street. Let me discuss the first part of his answer, and then come back to some crucial points about bailout later on.

Setting aside the devastating fact that not having to pay attention to what is going on today is an astounding privilege and raises the question of what world investors are living in, much less imagining, it is telling that investors, and their expectations, parameters, and worldviews, are the key shapers of the stock market. Now, Sorkin’s explanation focuses on the divergent timeframes between the stock market and the economy, which inadvertently highlights the stock market’s perversity (even its oddness and disconnection), without addressing the singular importance of the role of investors in today’s economy. He does not explain that the stock market rise shows how corporations have been structurally realigned away from employees (and from any commitment to employment as a general practice) and singularly toward investors. It is precisely this underlying problem that Colbert’s query points towards: why is the stock market, as a collective expression of company share prices, seemingly divorced from the concerns and material needs of most Americans, such as living wages, employment security, and upward mobility?

Moreover, understanding the relationship between the stock market, jobs, and the larger social economy is made even more difficult given the obfuscating and contradictory information from multiple social critics and commentators. For example, Paul Krugman, Nobel Prize-winning economist, notable liberal critic of socioeconomic inequality, and New York Times columnist, has regularly weighed in on the quandary in opinion pieces titled “Crashing Economy, Rising Stocks: What’s Going On?” and “Stocks Are Soaring. So Is Misery.” In the former article, he argues, “Well, whenever you consider the economic implications of stock prices, you want to remember three rules. First, the stock market is not the economy. Second, the stock market is not the economy. Third, the stock market is not the economy.” Sticking with the standard explanation that the stock market mainly moves because of greed, fear, future expectations, or interest rate policies, Krugman asserts that the answer is simply that the stock market is either loosely connected to or completely disconnected from “real economic growth.” He ends with, “Pay no attention to the Dow; keep your eyes on those disappearing jobs.” In the second article, he doubles down on the same theme, asking, “How can there be such a disconnect between rising stocks and growing misery,” and answering with tautological responses that rephrase the question: “The truth is that stock prices have never been closely tied to the state of the economy,” and “These days, the disconnect is even greater than usual.” He ends with the same quandary, leaving the reader exactly where they began, with no further insight: “Oh, and stocks are up. Why, exactly, should we care?”

The key issue with Sorkin and Krugman’s explanations is that they re-assert either disconnection or separate spheres/parameters, when the socially observant usually recognize that the stock market and the economy are somehow connected. In other words, does not a rising stock market in the middle of mass unemployment signal that the wealthy are somehow protected and that the rise or stability of corporate share prices is oddly antithetical to job security? This relationship is not distant at all. In fact, the stock market and the economy are deeply and intimately connected, and any attempt to assert disconnection not only misreads the room, but also overlooks the cultural decisions that both produced an inverse relationship between stock prices and employment, and a direct connection between stock prices and corporate profits and outlooks.

As it turns out, one of the most radical but still under-recognized shifts in the financialization of the larger social economy in the past forty years has been the active severing of the positive correlation between corporate “growth” (“performance” and profit) and employment. Employees and workers are no longer a key concern for corporations, neither in how they are measure health and performance, nor in how they imagine their constituencies. Employees and the responsibility for employment and job security have been thoroughly excised from the corporation’s main concerns, written almost completely out of the discursive and material practices and representations of the mainstream corporation, supplanted by singular concern for shareholders, investors, and those (i.e., financiers) who advise in their name. It continues to surprise almost everyone, from Colbert to journalists to academics, that corporations understand themselves as collections of assets maintained solely for the benefit and profit of large investors, and more specifically, for the financiers who enact these corporate transformations and restructurings in the name of the shareholder. The downsizing of the corporation and corresponding redistribution of former stakeholder claims to investors and shareholders have caused those resources that were previously invested in job growth and employment stability to be captured by financial interests and disbursed as stock price appreciation. Financialization, in other words, has wrought the explicit linking of companies (and the larger economy) to the stock market, not a disconnection from it. To fully apprehend how corporations and the economy have been re-aligned towards the stock market, and how employment and jobs were eliminated as key concerns of corporations, it is crucial to take a brief tour of the role of financialization and the reorientation of corporate America before we come back to the confusion surrounding the skyrocketing pandemic stock market and the problematic of disconnection.



A Brief History of Financialization and the Restructuring of Corporate America

  1. In the late 1970s and early 1980s, there was a moment of synergy/intersection between two domains of thought and action. On the one hand, financial economists and business school professors promoted a theory of the corporation called “agency theory,” a seductive-in-its-simplicity theoretical model based on an origin myth that portrayed shareholders as progenitors of the modern corporation.2 This fictional history was then used to promote the notion that managers and executives were singularly beholden to the true owners and principals of corporations – the shareholders.

  2. On the other hand, Wall Street’s financial actors and institutions were already advocating that corporations be restructured according to shareholder value, which translated to the practice of value extraction (downsizing and outsourcing), with the “savings” redistributed away from labor, employment, communities, and other stakeholders to financial advisors and investors.

  3. The key transformative event that operationalized both of these worldviews was the 1980s corporate takeover movement instigated by Wall Street leveraged-buyout firms. This movement sparked the financialization of corporations because it split them from the multiple stakeholder communities in which they were embedded and placed corporations into a narrowly commoditized space of exchange where stock price became their single most important aspect. It was only through increasing their stock price that corporations could avoid takeovers (by becoming too expensive). The takeover movement thus made share prices the primary concern of corporations, nearly erasing their previous existence as social institutions, and aligning them with “the investor.” Employment, jobs, benefits, security, and stability were excised from the imagination and practice of corporations.

  4. Of course, Wall Street, especially institutional investors, had long viewed corporations primarily as stock prices in portfolios because their viewpoint had always been shaped by their roles as spokespeople, advisors, and players in the financial markets. Stock prices are finance’s vantage point. The crucial historical, political, and socio-economic difference was that for much of the 20th century until the 1980s, this worldview was not dominant.3

  5. The activism of Wall Street financial institutions and actors, agency theory, and the takeover movement, then, reconceptualized the very nature of the firm. Corporations became bundles of assets for financial extraction instead of longue durée organizational entities that were embedded in communities, employment, and production. This transformation is central to apprehending the contemporary context and perpetuation of racialized inequality, as, since the New Deal, GI Bill, and post-WWII era, the modern corporation had been the central site for substantive profit-sharing among White, heteronormative men, with entry points all along the stable corporate ladder from headquarters to manufacturing plants, thus allowing hierarchical inclusion of White men from multiple class and national backgrounds. Importantly, the neoliberal and financial dismantling of this version of the corporation, which narrowed its wealth-sharing potential in ways that mainly benefited the elite, not only cast aside those who had previously been included, but also occurred at precisely the moment in the 1980s that civil rights, Black Power and third-world coalitions, and feminist social movements had succeeded in demanding openings in workplaces by radically linking socio-economic inequality and economy with racialized and gendered oppressions and structural violence. In other words, most people of color, especially from BIPOC communities, and women hardly had the chance to jump from segregated jobs to stable institutional ladders of upward mobility before the very nature of the corporation changed.

  6. For Wall Street, the transformation, reduction, and re-valuation of corporations into nothing but stocks that they could buy, sell, merge, and acquire went on to fuel the past four decades of financial deal-making. The financial industry was simply not empowered to do this before agency theory gave the Wall Street point of view academic legitimacy, and the Wall Street-led corporate takeover movement operationalized this worldview. Meanwhile, enabled by state polices and re-regulation, a flood of investments in mutual, pension, and retirement accounts gave financiers and financial institutions billions of dollars with which they could claim to speak for the investor and empowered their activist stance toward shareholder value. Importantly, the concomitant movement of retirement and other safety net benefits – such as 401(k) accounts, teacher pensions, college savings funds – into the financial markets strategically aligned upper-middle-class and elite (and some middle-class) groups with financial interests. Such a linkage made claims of investor democracy, not to mention demands for Wall Street bailouts during financial crises, much more palatable.



How the Financial Markets (and the Wealthy) Have Captured the Economy

Circling back to the conversation between Colbert and Sorkin, most people continue to be confused about the relationship between a rising stock market and a precarious economy because the transformations wrought by financialization are routinely obfuscated. Expert commentators are not the only ones eliding these major shifts: leaders of corporations still mobilize the (now outdated) assumption that companies are beholden to multiple stakeholders as a nostalgic marketing tool; and investors continue to promote the notion of an “ownership society” even though the top 1% own more than 50% of the value of stocks in the US (not to mention the historical fact that shareholders do not own the company, but rather its shares).

Of course, the experts and the pundits would have been correct fifty years ago: the stock market used to be less influential and cordoned off from the larger economy because corporations were not equated with their shares. Corporations paid relatively little attention to financial markets, and investors were only one among many constituents; the stock price certainly did not stand in for the complexity of the company as a long-term social institution.

Today, the corporation has been commandeered for the investor and singularly evaluated by the investor’s measuring stick - the stock market. The stock market, as a proxy for the entirety of the corporation, has become decidedly more powerful: it indexes the corporation, and thus can claim to be one of the most crucial indicators of economic health, to the extent that corporations make up a large part of socioeconomic activity. And, given that the top 10% hold 80% of all the value of the stock market, it would not be far-fetched to conclude the following: that corporations are framed as fully represented by the stock market, which is majority-owned by the wealthy, for whom the economy is run according to the parameters of shareholder value. And while it is certainly still the case that when most social observers imagine “the economy” in the largest sense, they include (and contest) manifold inputs, institutions, events, and conditions (from job creation to consumer prices indices), my point is that the sheer amount of focus on the stock market – its gravitational pull – is no accident, but rather indicative of how the entirety of the economy is being reductively measured.

Moreover, given the outsized influence of finance and the voices of the wealthy, Wall Street (simultaneously appealing to outmoded notions of multiple stakeholders and investor democracies) can count on government support in the form of bailouts because of the presumed importance of the stock market (and other financial markets) to the economy. When our current pandemic (and the slow and incompetent US response to it) first shocked Wall Street, the Federal Reserve, mimicking its subsidies of finance in the wake of the 2008 Great Recession, immediately jumped in to shore up financial markets with a “whatever it takes” approach, which included printing money, lowering already low interest rates, and perhaps most importantly, buying up trillions of dollars of securities (especially bonds) to inject into financial markets and prop up share prices. Of course, during the Wall Street-instigated financial crisis of 2008, not only did financial institutions receive a large share of the almost $500 billion Troubled Asset Relief Program (TARP), but the Federal Reserve also jumped in to “revive finance.” Through monetary policies and, in particular, loans and guarantees that covered the spiralizing and seemingly bottomless toxic financial investments made by Wall Street and global financial institutions, the Federal Reserve stabilized the credit markets for finance, re-instated finance’s “disproportionate size in the US economy[,] and restored the concentration of wealth and income among the richest” (Jacobs and King 2017: 22-23).4

The socio-economic consequences of these past four decades of financialization have accelerated inequality. Promises of upward mobility shored up by stable, paternalistic corporations have been dismantled, and no longer form an avenue to middle-class possibilities even for many of those previously included, with the situation even worse for the marginalized. It is thus not surprising that the wealth gap between Black and White people never closed after the civil rights and Black Power movements. The very conditions that made (White) middle-class wealth creation possible were precisely these aforementioned jobs and ladders on the one hand, and on the other, the federal underwriting and guaranteeing of mortgages that helped to construct a mass market in housing, which became, in turn, the central avenue for wealth accumulation in favored households. Neither avenue of accumulation, through employment or through homeownership, was made available to BIPOC communities. Moreover, when Wall Street and other banking institutions finally made mortgages available to the formerly redlined, the methodology had radically changed. Instead of low-rate, stable, and guaranteed mortgages as provided through the post-WWII GI Bill (combined with living-wage, upwardly mobile jobs that allowed mortgages to be paid), the recipe became one of “predatory inclusion” (see Taylor 2019), and the offerings were not subsidized loans, but “subprime” loans.

Furthermore, even though the state and high finance have collaborated to erode entire sectors of well-paying jobs (jobs that, by the way, were never broadly shared by most people of color or women), these structural sites have escaped scrutiny. Instead, economic populism mistakenly organizes around the fake culprits of reverse discrimination and special rights, i.e., the notion that the marginalized have received governmental largesse (“handouts”) at the expense of bootstrapping individuals (read as white and normative). In fact, the former mainly accumulated predatory debt while the latter received unmarked subsidies like the GI Bill and FHA loans, which were later obfuscated and relabeled as effects of “the market.” Of course, when neoliberal policies are packaged as cosmopolitan and multicultural despite the fact that they have mainly benefited the financial elite, and when markets are presumed to be meritocratic and neutral (as opposed to elite white racial fraternities), such presumptions further resentment and scapegoating against BIPOC communities. Right-wing populism seeks to obscure rather than reveal the consequences when corporations, now governed by the concerns of finance, are interested not in the welfare of workers, employment, or even long-term productivity, but in mergers and acquisitions and financial deal-making to boost stock prices and financial fees.

Our collective inability to discern that the stock market does, in fact, reflect and demonstrate the true colors of the economy prevents us from taking seriously and directly the inequality generated by financialization. If the stock market has nothing to do with the economy, if it is a disconnected and unrelated sideshow, then we both elide and misconstrue its crucial actions and astounding effects. And it is in the context of a pandemic, when the federal government spends billions of dollars to prop up the stock market,5 and corporations can hoard their profits for shareholders (not most employees) in the form of dividends and stock buybacks, that the values and priorities of our social economy become frighteningly clear.



Notes:

[1] I thank Gary Ashwill for this incisive “counterintuitive” phrasing.

[2] Historically and culturally, the modern corporation – unlike a car or a computer – could not be fully owned and claimed by a single entity called the shareholder or investor. Since the rise of the modern corporation in the late 19th century, it was framed as a social entity with a public purpose, and was not understood as simply a vehicle for shareholder value extraction. In fact, most shareholders historically did not invest in the value-creating capabilities of the company – they traded in the secondary markets, in the realm of finance and the capital markets, Wall Street’s domain, where liquidity, short-termism, and separation from the everyday life and operations of the corporation formed the historical context. The notion that shareholders were actually the original sources of capital, the founding investors who created the innovative capabilities of the modern corporation, is wrong. In fact, the modern corporation was built from retained earnings and through the work of founders and multiple stakeholders; shareholders simply exchanged shares in the secondary markets.

[3] The stock market and the corporation were historically separated and protected from each other. Wall Street firms specialized in the stock market, meaning they traded equities, and did not control corporations. They played with stocks and owned shares, not the corporations themselves.

[4] In this paper, Jacobs and King also remind the reader that guarantees were not made available to homeowners facing foreclosure and “toxic debt” from predatory subprime bank loans. Had such guarantees been offered to “Main Street,” the US would have ameliorated the recent skyrocketing growth of inequality, especially for African American homeowners, who were explicitly targeted for subprime loans, even if they had “qualified” for prime loans. As Jacobs and King (2017: 74-75) write, “The loans and guarantees for banks and non-banks were unavailable for the 13 million homes put into foreclosure proceedings from 2008 to 2013 – about 1 out of every 100 homes. The selective assistance to finance was extended without demanding…that the rescued banks and investment firms work to relieve the freeze in credit facing homeowners and businesses…”.

[5] Not surprisingly, these actions taken by the Treasury and Federal Reserve are often equated or elided as “the invisible hand,” as if favorable monetary policy, the printing of money, the lowering of interest rates, the buying up of trillions of dollars of securities, special loan and guarantees to corporations and particular credit markets, etc., were simply the workings of “the market.”



Acknowledgements: Many thanks to the American Ethnological Society “Pandemic Diaries” Editorial Team (Carole McGranahan, Gabriela Manley, and especially to Calynn Dowler) for their keen editorial eye and support. I also want to thank Gary Ashwill for his clarifying readerly insights and copy edits, and David Valentine, Sumanth Gopinath, and Beth Hartman for their critical insistence on putting together the puzzle of how financialization radically transformed corporations.



References:

Jacobs, Larry, and Desmond King. 2017. “Bringing in the Fed: How the Fed Generates Inequality.” Paper prepared for the Inequality in Trump’s America: Favoring Finance and the Federal Reserve Conference, Nuffield College, Oxford University, March 9-10.

Taylor, Keeanga-Yamahtta. 2019. Race for Profit: How Banks and the Real Estate Industry Undermined Black Homeownership. Chapel Hill: University of North Carolina Press.


Cite As: Ho, Karen. 2020. “Why the Stock Market is Rising Amidst a Pandemic and Record, Racialized Inequality.” In “Intersecting Crises,” Calynn Dowler, editor, American Ethnologist website, 12 October 2020, [https://americanethnologist.org/panel/pages/features/pandemic-diaries/introduction-intersecting-crises/why-the-stock-market-is-rising-amidst-a-pandemic-and-record-racialized-inequality/edit]


Karen Ho, an associate professor of Anthropology at the University of Minnesota, researches Wall Street and the culture of finance. Her work is especially concerned with the ongoing ramifications of financialization-gone-wild: increased socio-economic inequality, racialized extraction and scapegoating, and planetary unsustainability.