Concerns grow as Dow Jones surpasses 40,000 points

On Thursday, the Dow Jones exceeded the 40,000-point mark, marking a significant moment in the indicator’s history. This milestone is important for financial analysts and investors to consider, especially given the current uncertain state of the US economy, with high inflation and a slight increase in unemployment. Although the Dow Jones surpassed 40,000, it did not maintain this position, closing at 39,869.38 on Thursday, May 16th.

The risks of an economic bubble forming

The stock market is influenced by a wide variety of factors, many of which are speculative. Thus, understanding the significance varies on how much the event can be a generalizable indicator of the health of the US economy.

While many investors pointed to the news as a positive development and a sign of strong economic growth, that is far from the consensus opinion on Wall Street. As some financial experts have warned, the news is less positive if the rapid rise in the stock market, as reflected by the Dow Jones reaching new heights, indicates the formation of an economic bubble. Dow Jones’ own outlet spoke with Albert Edwards, one of the few investors who identified the dotcom bubble in the early 2000s and believes that the economy is suffering a similar fate today. Edwards sees the “hallmarks of a bubble” in the behavior of the market over the last five months, with the monetary policy imposed by the Fed and a “convenient narrative: that the “artificial intelligence revolution” will drive a boom in corporate earnings,” filling the bubble with air.

The benefits of a roaring stock market are not evenly distributed across income groups

Additionally, when looking at the bottom fifty percent of households in terms of wealth, this group only owns one percent of stocks. In other words, those who win when the stock market hits these historic highs are not those at the lower end of the income spectrum, and at times, gains in the stock market come at the expense of this group. The story is not much more positive for households in the fiftieth to ninth percentile, who have seen their share of stocks fall from 21.3 in 2002 to 12.1 in 2023.

The value of a company’s stock is often linked to increased profits, and one way to boost profits is by reducing labor costs. Stock prices can rise when management can cut worker pay, reduce benefits, or lay off significant portions of their workforce. Such actions can enrich those at the top of the income spectrum at the expense of the workers who create value for these companies. This issue is relevant to more than just low-wage workers. For example, Meta, the parent company of Facebook, Instagram, and WhatsApp, laid off approximately 23,000 employees in 2023. In the first quarter of 2024, the company announced a 117 percent increase in net income compared to the same quarter in 2023.

What is the difference between publicly traded and privately held companies?

An index like the Dow Jones only provides insights into publically traded companies, leaving out a huge corporate world segment. The stocks for sale are those for publically traded companies, which differ from companies that are privately held by financial institutions known as hedge funds. Cargill, the global food corporation, is a privately held company whose stock is not up for sale. However, Walmart, Apple, Meta, and many other megacorporations are publicly traded, meaning anyone with the means necessary can purchase stock in those companies.

How do investors influence the price of a stock?

As the owners of stocks, investors hold a significant influence over their prices. When a stock’s price fluctuates, investors can choose to buy more or sell, impacting its value. For instance, a rapid decline in a stock’s price may prompt many investors to sell, increasing the supply and pushing the price further. This scenario is prevalent during a ‘run’ on a stock when demand falls as supply increases.

However, investors on Wall Street examine the performance of publicly traded companies on a daily basis. Suppose a company reports an increase in profits or the development of a new product or technology that could increase its earnings in the future. In that case, investors will likely flock to that stock and increase their stake in the company. Unlike the example above, when demand rises for a particular stock, the price increases as a limited number of shares are available, and more people want them.

What are stock buybacks?

Companies can use this to their advantage through a process known as “stock buybacks,” when company profits are used to purchase more stock, artificially driving up the price. Profits could have increased because of the launch of a product that did well on the market. However, company executives could see that the price might begin to dip and preempt such a situation by artificially pushing up the price.

Stock buybacks were illegal in the United States for decades. Congressman Sean Casten (D-IL) explains on his website that the SEC “essentially legalized” the practice, and it quickly became “the most popular financial engineering tool in the C-Suite tool shed.” Some economists and financial experts warn that the practice puts the economy at risk and that the federal government should intervene to ban it before even more damage is done.

“And it’s obvious why Wall Street loves them: Buying back company stock can inflate a company’s share price and boost its earnings per share,” explains Rep. Casten, adding that the “metrics [...] often guide lucrative executive bonuses.”