High Stock Prices Are Not a Policy Objective


Steve Benen has a nice overview of conservative nonsense and hypocrisy about the gyrations of the stock market. But aside from the specific question of who deserves the blame or credit for whatever, it can’t be emphasized enough what an inappropriate measure this is. Consider the chart below looking at the price/earnings ratio of the S&P 500 over time:


As you can see here, there’s a ton of variability in this metric. Some of the variation seems to be related to interest rates, but a lot of it is, as best one can tell, driven by nothing at all. It’s “animal spirits,” it’s “irrational exuberance,” it’s a mysterious x-factor. In other words, high stock market prices could reflect low interest rates, which are the result of good policy. They could also reflect good opportunities for large businesses to earn money, which would probably reflect a good economic situation, though we shouldn’t rule out the opportunity that some worthy policy initiatives might for some reason or another structurally shift opportunities away from large publicly held corporations and toward small privately held ones. And they could also just reflect speculative mania that’s not really under the control of policymakers.

What’s more, while stock price declines that are due to slow or negative economic growth are bad things, they’re mostly bad things because slow or negative growth is bad. It’s not the case that higher stock prices are systematically beneficial. Financial news is mostly consumed by people who have substantial investments, and high stock prices are beneficial for those people, which is why the financial media tends to “root” for high prices.

But this isn’t systematically true. People who don’t invest in stocks at all can afford to be indifferent to the irrational aspects of stock market fluctuations. And young people who invest in stocks through a 401(k) plan—people like me, say—actually benefit from low stock prices. As the animal spirits get low, stocks get cheaper, which means that the money we’re putting into the 401(k) winds up buying more shares. The ideal scenario for any given person is to save money when the spirits are low and then retire when they’re high. But either way, seeing it as being the president’s job to create an unsustainable speculative mania is silly.