The Winners and Losers of the Corona-economy
The broader economic conversation seems to focus on the differing realities between capital markets and the overall economy, also known as divergence. Broad market equity-market indices are at or near all-time-highs; however, the wider, overall economy is struggling to recover from the worst downturn in nearly a century. The S&P 500 has recovered full to its pre-pandemic levels, with the NASDAQ up nearly 29%.
This bifurcation between the market and the economic realities of our time illustrates how the market is not the economy. However, these growth trends that are currently being experienced underpin the increasing inequity and inequality that has existed and is being facilitated by the pandemic economy. Securities and equity prices as well as market indices measure value creation for capital owners. This is not the same thing as value creation in the overall economy, where labor has a more direct impact.
Furthermore, the prices of the market reflect future expectations on capital returns. This underscores how there really is not comparable forward looking index to measure the present value of labor income. Thus, if there is going to be an economic rebound, the forecast for labor and capital-based income would diminish, but the future of capital income would be reflected in present market prices.
To add further complexity: market valuations are derived from intangible data points and assets such as ownership and control of data, which has its own avenues of monetization and value creation. In fact, according to a review of S&P 500 companies, stock prices in companies where employees have high levels of intangible capital have recorded the biggest gains, whereas companies with less or lower levels of intangible capital have performed worse.
Taken another way, value creation through incremental means in employment and the markets is diverging. While this was known before the pandemic, the overall trend is increasing a higher rate. The overall reasons for this are twofold: the first is the instantaneous adoption of digital technologies in response to lockdown measures. The second is that sectors of the economy which rely upon value creation through labor and tangible capital have been partly or completely shut down as a result of consumer risk aversion, social distancing, and lockdowns.
The Dow Jones US Airline Index clearly lost a large amount of value and has yet to recover. Normally, this economic sector generates value through tangible capital, fuel, and labor. The world’s major central banks, including the US Federal Reserve have support general market valuations through their interest policies. These interest rate policy regimes are principally aimed at creating a space for governments to use debt financing to stimulate the economy and develop programs in response to the pandemic shock.
While these efforts may provide support for the present market’s valuation, it does not address sector wide differences. These programs are only addressed for publicly traded stocks, and not private companies. Specifically, lower-income households and small businesses with thin margins and weaker balance sheets have been offered effectively no relief. Many labor-intensive sectors with massive labor pools (hotels, restaurants, and bars) have been partly shut down. In order to address these trends, government spending is being marshaled as a shock absorber for large parts of the economy.
However, not ever sector of the economy is receiving this aid. Since the crisis is boosting the value of certain companies, it’s worth analyzing ownership of those stocks. Obviously, private households and businesses with weak balance sheets aren’t benefiting. The present high-valuation companies are owned by high net worth individuals and institutions, entities with substantial balance sheets that can provide for economic resilience.
As we leave the pandemic and enter a post-pandemic phase, the sectors that utilize labor intensive means and do not experience high levels of intangible capital per employee may bound back. However, the digital divide will expand as the economy continues to implement virtual solutions leading to a continuation of the trend favoring intangible capital.
This trend is not abnormal, as intangible-capital-intensive sectors have an advantage: their cost structures are fixed, and they enjoy low to no marginal costs. Taken together, this allows the platforms to grow at scale which allows for significant power in the context of market access and pricing.
In conclusion, the new pandemic economy has further facilitated the pre-pandemic trend favoring value creation through intangible assets and firms with relatively fewer employees. This trend will continue; however, it will not be at the heightened rate experienced during the pandemic. Traditional businesses will recover; however, the disconnect the larger trend in the value creation for firms with high intangible assets per employees with remain – highlighting a new socioeconomic challenge.
The notion that the economy and the market are diverging reflects a specific focus on indices. No single metric can offer any useful insight into the overall behavior of the market. Given the current realities of the pandemic economy, equity markets do little to clarify outcomes due to the large divergences in economic conditions across employees and sectors.
Lastly, there is no way to reverse out of the rush into digital tangible assets and their associated value creation and the knock-on effects of rising wealth inequality. Because balance sheets of lower income and wealth individuals lack exposure to intangible and digital assets, they will not benefit from the gains that sector is experiencing.