Whenever you want to know how the U.S. economy is doing, one of the most common ways to do it is to look at the stock market. After all, it makes sense to check the NASDAQ or the S&P 500 and see if stocks are at record highs (to which President Trump will shamelessly point out on Twitter each and every time it happens), or if stocks are lagging and could potentially be a sign of the next recession.
However, while the stock market is admittedly a decent way to take an overarching view of the economy and how it is doing, the fact of the matter is that the stock market is not truly representative of the economy as a whole, at least not on an individual level. The reason that this is true is because of the simple fact that not everyone in the United States is invested in the stock market.
In fact, only a very small minority of the U.S. population really gets involved in stocks. Although it is hard to put an exact number on what percentage of Americans own stocks, the numbers clearly show that families with higher income are much more likely to own stocks than families with lower incomes. Playing the stock market is in fact a rich man’s game.
And this totally makes sense given that the less money you may have, the less likely you are to invest in stocks rather than spend on things that you actually need right now. The best way to look at stocks are as long-term investments that will appreciate over many years. And if you are a single mother struggling to put food on the table for your kids each and every day, it’s unlikely that you would be willing to set aside money in the stock market. On the other hand, if you have plenty of money to blow, then you are much more likely to be ok with setting aside money in the stock market, especially if there’s a chance that it will appreciate significantly.
On that very notion of appreciation though brings up another good point – stocks do not always appreciate in value over time, and in fact can depreciate if you are not careful. Investing in stocks isn’t just about having the money, but also having the time to really look into all of the various stocks and making your best judgement as to which stocks will appreciate over time rather than depreciate. And similar to the previous analogy, someone who is well off and has the money to invest in stocks is much likelier to also have the extra time to research those stocks compared to a single mother or someone who generally has a lot more on their plate on a day-to-day basis.
With all of that in mind, it should make perfect sense as to why stocks truly are a rich man’s game. And once this point is clear, it should be obvious why the belief that stock market success indicates a strong economy is somewhat of a fallacy. And now I do say “somewhat” because there is no doubt that having a strong stock market does indicate an overall strong economy. However, much of that strength is tied only into the people who are actually invested in the stock market, and as we just discussed, those people are predominantly those with higher incomes.
So while politicians will undoubtedly tout the economy when it is going well, do not forget that a strong economy can still mean middle class and low-income families may be left behind. It is important to actually look at the middle class directly to see if the economy is truly working for them like it is for the wealthy. This can be done through a variety of means, including looking at their wages and if it has risen over time, along with how much taxes they are ultimately paying to Uncle Sam each and every year and whether that number has decreased over time.
The economy has a lot of moving parts, and many different people that make up the economy as a whole. So rather than look at just the stock market as an indicator of the economy’s overall health, keep in mind that the stock market is only one small piece of the puzzle, and not the definitive way to judge how our great country is doing economically.