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Watch What You Ask For

Updated: Jul 18, 2023

“Anything that just costs money is cheap."

John Steinbeck

Most of the portfolio managers I speak with are frustrated with the stock market’s recent price action; it’s difficult to reconcile its recent bounce back from virtual oblivion when the economy continues to fall apart on so many levels.

Last week, we learned that gross domestic product collapsed by 32% in the second quarter, yet the S&P 500 is hitting another new high today. The stock market has continued to go up even as consumer confidence plunged in August to its lowest reading since 2009. The surge in equities also coincides with 44% of Californians reporting levels of anxiety and gloom typically associated with diagnoses of generalized anxiety disorder or major depressive disorder. …Apparently, our 401k’s are doing fine, but the rest of our lives are falling apart.

Here’s another thing to feel not-so-great about: The stocks that are carrying the market are the ones that make it possible to get rid of you. Vincent Deluard, director of global macro strategy at brokerage StoneX Group Inc., divided the S&P 500 into groups based on a measure he calls “market value of intangible assets per employee” -- the price of a company’s intellectual property and brand recognition compared with the number of people employed. The cluster with small numbers of employees relative to company value has returned 18% this year. The group with the highest labor intensiveness has seen a 19% loss.

Equity prices and market indices are measures of value creation for the owners of capital, which is not the same thing as value creation in the economy more broadly. We see evidence of that in tech surging while banks fall, in growth rising as value drops, in big companies thriving while small ones struggle. A common refrain has been that “the stock market isn’t the economy.” However, going by Deluard’s logic, that isn’t true. Rather, the market is a reflection of the economy – a societal viewpoint on which companies will flourish in the future. Market valuations are increasingly based on intangible assets, not the least of which is the ownership and control of data, which demands its own means of value creation and monetization. In other words, equity markets have moved higher as a reflection of the actual economy that we have right now-- it just may not be the economy we would like to have.

Because the current crisis is actually boosting the value of certain companies that control data, it is worth asking who owns the bulk of their stock. It certainly isn’t the private households and businesses whose balance sheets have been vaporized by shutdowns. No, today’s high-valuation companies are owned by individuals and institutions with balance sheets that are already substantial enough to provide a cushion of economic resilience. While labor-intensive companies with lower intangible capital per employee may enjoy a period of outperformance as they bounce back in a post-pandemic era, the economy’s digital footprint is still only likely to expand, and the underlying trend favoring intangible capital and its owners will continue.

In the age of idolization of the Silicon Valley CEO, I suppose we’re getting just what we asked for.

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