Welcome to the Recovery
We have been in the longest bull-run ever for over a month now. The market is repeatedly hitting all-time highs, bolstered by strength from stocks like Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Boeing (NYSE:BA). The leading economic indicators, including manufacturing and inventory, are showing incredible strength. The Fed is hiking rates. Everything is pointing to an economic recovery, right?
Not from the viewpoint of the average consumer.
The VIX: Determining Market Direction
The VIX is a measure of uncertainty in the stock market, and is calculated from the implied volatility of the S&P 500 options. It has remained stable for the past year, with a standard deviation of 4.34 and a median of 12.715. The VIX has spiked on a Year-Over-Year basis, up almost 27% from this time last year.
Source: Yahoo Finance
This small upswing doesn’t even compare to the spike that we saw in February, where key volatility products, such as XIV, were actually halted. But the current movement can be explained by “dollar strength, a pullback in emerging markets geopolitical issues in Italy, Brazil and elsewhere and midterm elections in the U.S.” as well as “high valuations for the pivotal tech leaders” says David Biance, the CIO at DWS Group. There are definitely some variables that contribute to uncertainty.
The VIX trades inverse to the SP 500, so usually when the S&P 500 is at all-time highs, the VIX is near all-time lows. Despite the recent upward year over year move described, the VIX is most definitely around its all-time lows. The 1st quartile for VIX data since 1990 is 13.57. On Friday, the VIX closed at 12.12, so it’s currently trading in an almost 30 year 25th percentile.
The VIX is still insanely low. Even on February 5th, when it hit 37.32, the S&P 500 declined 8%, traded flat until May, and remained its persistent climb.
But to almost 50% of all Americans, none of that matters.
The Market: Why It Really Matters (But Only To Some)
But the market will still chug along. The S&P 500 is still posting record highs, rushing towards new tops every single day. The DJIA, the NASDAQ, and the Russell are on the same relentless upward trajectory. And this is in the face of the September Slump, a time where stocks are usually weak.
It’s in the face of a potential trade war. A controversial NAFTA deal (the US-Canada-Mexico Agreement). US sanctions on Iran. A weakening Chinese economy. Hurricanes. Rampant cyber security issues. In the face of midterms and a painful Supreme Court confirmation case, resulting in bipartisanship that has evolved us into a nation divided. But the market churns higher. It’s like Teflon – nothing seems to stick. Nothing seems to push it down.
But it doesn’t matter to most of Americans.
The Disconnect: Why The Movement in the VIX and the Market Doesn’t Matter
The evident disconnect between consumers and the market is obvious. There are people who are obsessing over cannabis and crypto, looking for a get-rich-quick technique, and forgetting to pay attention to the fundamentals of investing. And then there are the people who can’t afford to think about the stock market, and are working 3 jobs to make ends meet. Why on earth would they associate with anything that 1) takes their money and 2) reminds them of the Great Financial Crisis?
We have this financial hierarchy where 48% of consumers don’t even know what’s going on. They are completely removed from any potential gains that the market has seen over the past 10 years – the threefold increase in value of the S&P 500 means virtually nothing to almost half of Americans.
Only 54% of US adults owned stock in 2017, according to Gallup, and most of that was in a 401(k) or an IRA. The only people that invested more were the 65+ people, and those with an income level of over $100,000. Every other category saw declines across the board, which is a completely uneven investment distribution.
Edward Wolff, an economist at NYU, has wrote extensively about wealth trends. As of 2016, 10% of Americans own 84% of all stocks. That means that 90% of Americans own 16% of all stocks – a difference of approximately $20.4 trillion in wealth, using 2017 SIFMA Fact Book measure for domestic stocks.
94% of the very rich had significant stock holdings ($100k+) where only 27% of the middle class did. The middle class is much more inclined to hold their wealth in housing, which makes them very susceptible to the pain of 2008. More than 1/3 of Americans have no access to pensions or retirement accounts.
The youngest generation is barely investing.
The theory is that the wealth that the top 20% reap should “trickle down” to the average consumer, signaling that things are going well, and encouraging the average consumer to spend more, and thus push the economy along.
As Ben Bernanke, former Chairman of the Federal Reserve, said:
“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
Unfortunately, that idea seems to only work in theory. The stock market is not the economy. Economic growth had been sluggish until recently, propelled primarily by the tax law and Trump’s attack on business regulations. Regulatory activity has declined 74% since he has been in office. He’s been using a significant amount of debt to fuel growth, and public debt has swollen right alongside it, increasing by 9% since the beginning of his tenure.
That’s the stuff that matters to most Americans.
The Economic Indicators: The Trump Bump
The Purchasing Managers Index is on a 24-month upward trend, posting a 61.3% increase for the month of August. When the PMI is greater than 43.2% that indicates that the economy is expanding. Based on this metric, the economy has been expanding for 112 months. 9.3 years of solid expansion. Sounds sustainable.
New residential sales increased into August by 3.5% and new construction increased by 9.2%. Consumer spending rose 0.3% into August, “driven by outlays on healthcare, which offset a drop in motor vehicle purchases.” Unweighted wage growth is up 0.1% from August of 2017 and 0.2% from July, and has shown minimal improvement since the Recession.
Corporate earnings, boosted by tax cuts, are at all-time highs. CEO pay increased 17.6% from 2017 numbers (primarily driven by the increase in realized stock options as a form of compensation). As Lawrence Mishel and Jessica Schieder write “High CEO pay reflects economic rents—concessions CEOs can draw from the economy not by virtue of their contribution to economic output but by virtue of their position”. The regular consumer is not compensated in the form of stock options.
And that’s why their wages look like the graph below.
Source: FRB Atlanta
The market has been on a tremendous rally, boosted by Trump spending and a cooling of regulation. But, only 46% of consumers benefit from any movement in the market. There is an inherent disconnect between stock market strength and economic growth.
Despite talks of a trickle down effect, most consumer-based economic indicators (notably wage growth) are flat. Consumer spending was driven by healthcare. That doesn’t reflect a strong economy – that reflects a convoluted healthcare system. CEO wages have far outpaced the wages of the average consumer, primarily because CEOs are paid based on market direction. The average consumer 1) can’t afford the market or 2) doesn’t know how / what / when to invest in. It’s not an accessible discussion for the majority of consumers.
It doesn’t really matter that the VIX is creeping upwards, because it’s still trading in its 25th percentile. The VIX has been under fire on the speculation of manipulation, so using it as a tool to measure market uncertainty has become murkier.
The stock market has persisted higher in the face of the most demanding factors. It has delivered stellar returns. But a little over half of all Americans benefited from that.
We need a conversation about the stock market, about investing, about understanding saving, and helping people realize that they too, can benefit from market movement. Because none of this growth REALLY matters if 48% of Americans didn’t realize that the market has gone up the past 10 years.
In the meantime, the VXX could be a good play for those that do invest. It's sitting right around a 52-week low and should be due for a steady climb upwards as some of the previous variables get priced back into the market.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.