July 18, 2024
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The Stock Market Is Absolutely The Economy, Here’s Why

The Stock Market Is Absolutely The Economy, Here’s Why

One of the most common pushbacks I get from some of my investing and economy-related articles is that the stock market isn’t the economy. To conflate the two could be a mistake. I see their point of view as not everybody owns stocks. Therefore, not everybody will benefit from rising stock prices.

As an example, here’s a comment I received on my post, “How Homeowners and Renters See the Economy Differently“:

While I don’t change my investment strategies regardless of personal optimism toward the economy (or lack thereof), I felt this article falsely equates the stock market to the economy. Sure, stocks have done very well—you only need to look at a graph to see it. But there are huge affordability problems right now in many parts of the country—groceries, insurance, and so forth. Many things homeowners are every bit as vulnerable to as renters. Meanwhile, since renters are more likely to be lower income, they’re even more vulnerable to these costs!

Fair points. However, as I grow older, I realize more and more that the stock market absolutely is the economy. Stock market wealth affects the economy more than some realize.

The Percentage Of Americans That Own Stocks

If only around 61% of Americans own stocks, how could the stock market be the economy? Or, put differently, how can the stock market truly reflect the economy since not everybody benefits from a bull market or gets hurt by a bear market?

See the survey below on U.S. stock ownership by Gallup.

Why The Stock Market Is The Economy

The reason why the stock market is the economy is that stock market wealth gets turned into spending, and spending is the largest portion of GDP.

Since stocks provide zero utility, the only way to capitalize on any stock market gains is to occasionally sell and buy something you want or need. As a result, the more the stock market goes up, the more money will be spent on all aspects of the economy.

In turn, the prices of goods and services change and affect every consumer, whether they invest in the stock market or not. Unlike the discrimination we see by colleges favoring certain groups of applicants over others, there is little to no discrimination when it comes to buying goods and services.

A Honda Accord isn’t going to cost less because you’re Asian, even though it’s an Asian brand, just like a ribeye steak isn’t going to cost more because you’re Black or White. The costs are the same no matter who you are.

Yes, there are senior citizen discounts at some restaurants and on most public transportation. However, for the most part, companies that provide goods and services are not allowed to discriminate against its customers.

People who don’t invest in the stock market have to compete with those who do. During a bull market, those who don’t invest in the stock market or other risk assets will be at a disadvantage.

Let’s go through some examples to explain why the stock market is the economy.

Apple Stock Finally Catches Up to AI Mania

On June 11, 2024, Apple announced a slew of AI software features during its Worldwide Developers Conference. Critically, Apple noted that due to processing requirements for its “Apple Intelligence” features, only people with an A17 or later chip in iPhones and Macs and iPads with M-Series chips will benefit. As a result, there will be a huge upgrade cycle for iPhones when the 16 comes out.

Apple’s stock surged by 7.26%, added $215 billion in market cap, and hit an all-time high the day of its AI announcement. Apple employs about 12,000 employees at its headquarters in Cupertino, California. The company has tens of thousands of other employees who own stock. Worldwide, Apple employs about 161,000 people (mostly in retail).

You can bet that these tens of thousands of Apple employees are feeling richer. As a result, they are going to spend incrementally more of their cash flow and sell some stock to buy things like cars, homes, clothes, and travel. In turn, their demand for goods and services will drive prices up for the rest of us.

At Least We Can Invest In Apple And AI

Luckily, all of us can invest in Apple stock as well as private AI companies today. Everybody who owns shares in an S&P 500 Index fund is also an Apple, Microsoft, Nvidia, shareholder, and more.

Personally, I’m on my way to build a $500,000 portfolio of AI companies over the next several years to hedge against a difficult job market for my children. If AI turns out to be a dud, then my children will likely have jobs. And if AI is a game changer, then they won’t need to work!

To invest in private AI companies, check out the Innovation Fund. The investment minimum is only $10, enabling you to easily dollar-cost-average in and gain exposure.

Real Estate Rental Example With Apple Money

I have a tenant who works at Apple. I know exactly how much he makes, including his stock grants, because it was part of the rental application.

He and his roommates, who also work in big tech, have already agreed to an 8% rental increase next year. It was part of the initial lease agreement to make rent increases less awkward. The extra $700 a month in rent is insignificant to them based on how much more money they are making thanks to the rise in Apple, Google, and Microsoft’s share prices.

However, to me, the $700 a month is significant, as that adds $8,400 a year to my semi-passive income total. I’m trying to grind my way back to financial freedom by the end of 2027 after blowing up my passive income.

This future extra income gives me more confidence to take more investment risks and spend more money. Because with the way things are going, the true market rent will likely be $1,000 more a month once their one-year lease is up. So if the tenants leave, I am not too worried about finding replacements.

Real Estate Buying With Tech Stock Gains

Now think about the Apple employees looking to buy nicer homes with appreciated stock. Sure, they’ll have to compete with the Google, NVIDIA, Netflix, and Facebook employees, who have all seen their stock prices surge higher as well. But one Apple employee who pays top dollar for a home is going to affect the valuations of all the homes nearby.

Whether you invest in the stock market or not, these homes will sell for whatever the market is willing to pay. Homes will not sell at a discount to buyers who do not invest in stocks.

Instead, the selling prices of homes will reflect the economic environment, which is dictated by the income and wealth of employees with stocks that have appreciated tremendously.

Real estate is a free market where those with the most money can effectively compete to buy the most desirable homes. While brokerage firms may have diversity hiring initiatives for real estate agents, no rational seller will choose an agent based on diversity alone. Instead, sellers will hire agents based on their skills, network, personality, and past results.

The stock market is the economy

How The Stock Market Affected My Home Purchase

When I was looking to buy my current home in mid-2022, tech stocks were plunging, and I was heavily invested in tech stocks. My home’s previous owner got into contract with a Google employee for $200,000 over asking at the end of May 2022. I couldn’t even afford the house at asking price, let alone $200,000 over asking, so I didn’t bother to submit an offer.

Unfortunately for the seller, the buyer backed out because, according to the listing agent, the buyer was fearful Google’s stock price would keep going lower and his wife didn’t want to do the reverse commute from Mountain View. Back-to-work was in the works.

Google’s stock reached a high of $149.95 on November 15, 2021, and went down to $86.70 on October 31, 2022. At the time the buyer got in contract, Google’s share price was around $114.

The seller decided to take the home off the market in June 2022 and contacted me off-market in May 2023 at a lower asking price. I was intrigued because my stocks had rebounded. However, I stayed patient for several months until I used some strategies to get an even lower price.

A Window of Opportunity to Buy Without Much Tech Competition

I have been outbid many times by tech workers throughout my years buying property in San Francisco since 2003. It has been frustrating since I was either working in a dying finance industry with a falling company share price or didn’t work at all.

So in mid-2023, I had to decide whether this was my opportunity to finally buy my dream home off-market without the usual tech money competition. Mortgage rates were high and full confidence had not yet returned to big tech companies everywhere.

Today, if my home came back on the market, there is no way I would have been able to compete given almost all big tech stocks are now at an all-time highs. I would have been thoroughly outbid in a bidding war given I’m a writer, not a VP or Director-level employee with millions of RSUs that have appreciated handsomely.

Redfin estimate show bidding war pushing prices to all time highs - An example of why stocks are the economy
Example of a home asking $4.7 million and selling way above Redfin’s estimate due to a bidding war

The Stock Market Determines The Future Of Private Companies

There is a backlog of private companies looking to go public or get acquired. A strong stock market means publicly traded companies have more appetite and buying power to acquire more private companies. In turn, the employees of these private companies receive cash and public stock compensation, which can be sold. Putting cash into the hands of private company employees injects money into the economy.

Without a strong stock market, hundreds of thousands of private company workers will have a tougher time getting liquidity. Meanwhile, limited partners in venture capital funds and private real estate funds will also see fewer exits. As a result, less money will flow into the economy.

However, as a limited partner in several closed-end funds myself, I noticed a flurry of surprise capital calls at the end of 2023, as private funds started aggressively putting their capital to work after more than a year of inactivity. Then, in the first half of 2024, I received a significant real estate capital distribution, which emboldened me to spend more.

With a bull market in stocks today, it is inevitable that more private companies will go public. More private companies will also get acquired, liquefying both private company employees and its investors.

The key is to invest in the things these private company employees want before the tsunami of liquidity occurs. The most prudent thing is real estate.

Number of IPOs per year from 2000 - through 1Q 2024. The stock market is the economy
A bull market in 2020 and 2021 ignited the IPO market

Stock Market Gains Can Affect Who Gets to Go to University

Do you know why universities continue to charge an arm and a leg for tuition? It’s because there are enough families in the world willing to pay these prices. If there weren’t, the universities would lower tuition, offer more scholarships, or shut down.

I’ve been complaining about college tuition since I was in high school in the mid-1990s. I found it egregious to pay $20,000+ for private university tuition then, which is one of the main reasons why I attended The College of William & Mary, a public university. The in-state tuition for Virginia residents was only $2,800, low enough where I could pay for it through my $4.25 minimum wage job at McDonald’s.

Do you think private universities back then or today care whether your family invests in the stock market or not? Not really. What they care about is finding enough families to pay their various tuition rates to maintain their operating budget. Yes, universities will offer grants and scholarships to accepted students from low-income households. College rankings are now increasing the weighting on colleges that accept Pell Grant students.

However, don’t think for one second that families who are able to pay full tuition don’t have an edge in admissions over a student who requires heavy financial assistance. Universities ultimately run a business. There is a formula schools use to come up with an acceptable total tuition revenue figure each year. Tuition discounts are only available to a minority.

Investing in Stocks Through a 529

Parents who have contributed to their children’s 529 plans since they were born will likely end up with more money for college tuition than those parents who do not. As a result, with more money for college, kids will have more college options to choose from.

There won’t be a sad story of getting into a reach private university, only to find out their parents didn’t save and invest enough in stocks to afford the tuition. The smart kid has to go to their local state school or community college, which are also awesome choices.

Instead, the college-bound student will be able to pay $100,000 a year in tuition in today’s dollars to attend schools like USC and NYU with no problem! The cost is egregiously expensive, but it must be worth it given prices keep going higher. And if these types of universities are worth it, it must mean graduates from these schools are getting high-enough paying jobs.

Therefore, investing in stocks through a tax-efficient 529 plan affects the economy. These expensive college graduates will end up making more money and spending more money than cheaper, less prestigious college graduates, thereby boosting the economy further.

The cycle may continue as leftover 529 funds get converted into a Roth IRA to be used by lucky children. A 529 plan is one of the best ways to transfer generational wealth. Instead of giving money, you give the gift of education, which is like teaching a person how to fish.

Ivy League median earnings and average annual cost

We Invest in Stocks to Pay for a Better Life

Only misers buy stocks and never sell to pay for a better life. But rational people invest in stocks for a reason. The main reasons people invest in stocks include:

All of these things are part of the economy. Yes, of course, you should invest in stocks to hedge against inflation, diversify, and build more wealth. But ultimately, you need to sell some stocks to pay for things.

Stock prices are a reflection of a company’s current and future earnings. Companies pay millions of people’s salaries. With a U.S. personal saving rate of under 4%, the vast majority of salaries are spent on goods and services. Therefore, of course, the stock market is the economy.

When the inevitable day comes when stocks enter a bear market, it reflects a poor economy with growing unemployment, a slowdown in demand, and a decline in earnings.

You Had Better Invest In Stocks For The Long Run

Given that goods and services can’t discriminate against people who invest in stocks or not, you should invest in stocks to give yourself a better chance at growing your wealth faster.

How much of your net worth should be in stocks will depend on your age, financial goals, and risk tolerance. Luckily, I have a post that answers such a question called “The Proper Asset Allocation of Stocks and Bonds by Age.

If you plan to own real estate, which I highly recommend to at least get neutral housing inflation, you can read my post called “The Recommended Net Worth Allocation by Age.” The post will provide a logical framework as you try to invest in both stocks and real estate in your lifetime.

Over time, the wealth gap will continue to widen between those who invest in stocks, real estate, and other risk assets like venture capital, and those who do not. As a result, you had better start today. And if not today, then at least during the next downturn, provided you have the courage.

Reader Questions About The Stock Market And Economy

Do you think the stock market is a good reflection of the economy? If not, why not? How is the stock market different from the economy? Are you not spending more during a bull market and reducing spending during a bear market?

If you want to invest in private artificial intelligence companies and other growth sectors, check out the Innovation Fund. The fund invests in fast-growing AI, modern data infrastructure, financial technology, and property technology companies. With only a $10 minimum, anyone can invest and gain exposure to some of the world’s most innovative companies.

To invest in real estate passively, consider Fundrise. Fundrise manages over $3.5 billion in assets for more than 500,000 investors. The company predominantly invests in residential and industrial real estate in the Sunbelt region, where valuations are lower and yields are higher. As mortgage rates decline, the demand for real estate increases.

To expedite your journey to financial freedom, join over 60,000 others and subscribe to the free Financial Samurai newsletter. Fundrise is a long-time sponsor of Financial Samurai and Financial Samurai is a six-figure investor in Fundrise funds.

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