Recent weeks have delivered strong gains for investors in equities, even as broader economic indicators suggest strain. Stock indices continue to reach new highs, Bitcoin is surging, and gold—a traditional safe-haven asset—has climbed nearly 50% this year, all while demand for the U.S. dollar declines. n nAt the same time, the federal government remains shut down, leaving hundreds of thousands of public-sector workers without pay. Key economic reports on employment and inflation are on hold due to the lapse in government operations. Available private-sector data does not reflect robust growth: ADP reported a loss of 32,000 jobs in September, with small businesses—often early indicators of economic stress—hit hardest. n nThis divergence between financial markets and real-world economic conditions raises a critical question: how can investor sentiment remain so optimistic amid weakening fundamentals? n nTwo distinct economic realities appear to be emerging. One is the lived experience of most Americans, where income disruptions quickly translate into financial hardship. The other is the capital-driven economy, where asset prices respond more to monetary policy and technological innovation than to the financial well-being of average households. n nThis divide has been widening for years, but the government shutdown has made it more visible. Markets aren’t rising because investors are ignoring economic risks. Rather, the capital fueling market gains is concentrated among institutions and high-net-worth individuals who are largely insulated from short-term economic shocks. n nThe top fifth of earners account for over half of U.S. consumer spending and control the majority of investable assets. These groups tend to react more to interest rate shifts and breakthroughs in artificial intelligence than to whether a federal employee misses a paycheck. When wealth grows at the top, it flows into equities, venture capital, and other financial instruments that push market indices upward—creating a self-reinforcing cycle. This dynamic helps explain why Wall Street can thrive even as Main Street faces headwinds. n nAnother factor is the absence of official data. The shutdown has halted releases from key agencies tracking jobs, inflation, housing, and trade. In theory, this information blackout could unsettle markets. In practice, major financial firms rely on alternative data streams—such as credit card transactions and satellite imagery of shipping activity—allowing them to maintain situational awareness. While public transparency suffers, institutional investors still have access to real-time insights. n nMeanwhile, corporate profitability may be benefiting from a combination of restrained hiring and AI-driven efficiency gains. Goldman Sachs strategist David Kostin recently argued that earnings forecasts are too cautious, while Morgan Stanley’s Michael Wilson described the outlook for corporate profits as the strongest since 2021. Whether accurate or not, such narratives can themselves drive market momentum. n nOne striking indicator of market exuberance is Warren Buffett’s preferred market-to-GDP ratio, which has reached 217%—a record high. This means the total value of U.S. equities now exceeds twice the nation’s annual economic output. During the dot-com peak in 2000, the ratio topped out at 175%. n nIs the market in a bubble? Possibly. But the deeper issue is structural: financial markets have consistently outpaced the broader economy for years. The current shutdown highlights this gap but did not create it. n
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Why the stock market is up even as the economy weakens
It’s been a great few weeks for almost anyone with money in stocks, and a bewildering one for anyone trying to explain the market. Stocks keep breaking records, Bitcoin is on a tear, and gold, the age-old “safe-haven” play, is up a stunning near-50% this year while investors are dumping the USD. n nMeanwhile the U.S. government remains shut down, which means hundreds of thousands of federal employees aren’t being paid. New data on jobs and inflation are on pause, too. Still, what economic data is emerging doesn’t suggest strength. The private sector shed 32,000 jobs in September, according to ADP, with small businesses — often the canary in the economy’s gold mine — taking the biggest hit. n nHow can the data point in such wildly different directions, reflecting both market exuberance and economic strain? n nA tale of two economies n nPerhaps the simplest answer is that there isn’t just one U.S. economy anymore. There’s the economy most Americans live in, where a missed paycheck means that bills pile up, and then there’s the stock-market economy, where capital keeps flowing whether Washington’s lights are on or not. n nArguably, this split has been building for years, but the shutdown makes it harder to ignore. Stocks aren’t rising because investors are blind to economic crisis. They’re rising because the money that drives them belongs to people who are, by and large, structurally disconnected from economic pain. n nToday, the top 20% of earners account for more than half of U.S. consumer spending. Most investable capital is held by institutions and high-net-worth households that respond more to interest rates and technological breakthroughs and less to whether a TSA worker misses a paycheck or even a mortgage payment. n nWhen the rich get richer, their money doesn’t sit idle. It flows into stocks, private markets, venture capital, and other asset classes that broadly function to push indices and similar indicators ever higher. That feedback loop explains why Wall Street can keep busting through ceilings even as Main Street struggles. n nA blackout rally? n nOf course, there’s another wrinkle to all this: information is missing. The government shutdown is silencing the agencies that publish the data markets are often characterized as reliant on — including employment, inflation, trade, and housing. n nIn theory, the blackout could spook investors. In practice, it’s so far made little difference, perhaps because large financial institutions have long since developed their own data pipelines, from credit-card spending trackers to satellite-based shipping reads. The public scorecard is missing, which may make the Fed’s path cloudier, but the pros still have play-by-play coverage. This when a “jobless expansion” and AI breakthroughs may already be working to expand corporate margins. n nNot coincidentally, Goldman Sachs strategist David Kostin said this week that Wall Street’s profit forecasts are “too conservative.” Morgan Stanley’s Michael Wilson called the setup for corporate earnings the best since 2021. Whether they’re right or not, the narrative itself may help fuel the rally. n nThat’s how you end up with Warren Buffett’s favorite market-to-GDP ratio hitting 217%, its highest level ever, which means U.S. stocks are now worth more than twice the nation’s annual economic output. In 2000, when the dot-com bubble burst, that ratio peaked at 175%. n nSo, are we in a market bubble? We could be. But the mix of data also reflects a more fundamental disconnect. The market has been running ahead of the broader economy for years. The shutdown makes that gap clearer, but it didn’t create it.