The value of a given stock, and by extension of the stock market as whole, depends entirely on perception. If speculators perceive that a stock is likely to go up, they buy it, and if enough of them do the same, the price of that stock goes up. And if they believe the price of a given stock will go down, they sell it, which drives down the price if enough speculators also sell their shares. This is altogether obvious — it’s the way one might explain the stock market to a child — but you wouldn’t know it by listening to the ever-present news reports on the vagaries of the stock market, which insist on the fiction that the actual value and profitability of companies are what drives stock prices.

Sure, the price of a stock does reflect to some extent how well that company is actually doing, since that’s part of what shapes the perception of speculators, but unless a company is obviously tanking, it’s only a sideline in the way the stock market functions.

We hear so much about the need to boost “investor confidence.” Gee, is that because Wall Street analysts are so worried about our collective feelings of contentment? Of course, not, it’s because “confidence” will lead people to buy stocks, thus raising stock prices and increasing the wealth of the largest stockholders.

The notion that a healthy stock market is good for everyone is presented as a given. It’s even conflated to mean that if the stock market is up then the economy is doing well, and that should benefit everyone since most people need a job to survive, and if companies are doing well they are able to hire workers. But one thing has very little to do with the other. When companies announce layoffs their stocks usually go up, at least in the short term, which is the only term speculators are interested in..

This is from an article about hedge funds, which are especially pernicious (from what little I understand of them), but what the author says applies broadly to “short-selling,” the widespread practice engaged in by speculators of buying stocks to keep them only for a short time in order to turn a quick profit by taking advantage of the market’s constant up-and-down shifting:

Too much speculation turns the markets from an investment vehicle into a casino. Most commentators about the market ignore this. When the market suffers big losses on a single day, they find some small piece of bad economic news and attribute it to that. When the market gains a lot on a day, they look at the overall upward direction of the economy and attribute it to that. When the market stalls and seems to move aimlessly, they say the American economy is stagnating. The point is that even though the market is behaving in unfamiliar ways, it is explained as if it were behaving in traditional ways. Nowhere is the change in the players in the market recognized. The change in the means by which large players seek to profit and the greater role of the hedge funds and of speculation via short-selling is ignored.

And what about the notion that most average people have investments in the stock market and therefore bad performance hurts even the little guy? According to the Economic Policy Institute [pdf]:

Less than half of American households are invested in the stock market in any form –either directly or indirectly through mutual funds or 401(k)s. The percentage of households that own stock was 48.6% in 2004. The percentage of households with more than $5,000 in stock was 34.9% in 2004. The wealthiest 20% of households own over 90% of all stock value. For the top 1%, the average value of stock holdings was $3.3 million in 2004. The average value of stock holdings for the middle 20% was $7,500 in 2004.

No doubt it’s frightening for those who have 401(k)s invested in the stock market to see their retirement shrivel up. Yet the majority of Americans have very little or no investment in the stock market at all. So why is there so much emphasis placed on the stock market in the public discourse? Because it benefits the wealthy, of course. As long as people keep on buying stocks — and at the very least refrain from selling the ones they have — the wealth of the rich will continue to increase. At the same time, the little guy who has no insider information and is not savvy about stock market dynamics is the one who will get screwed by the shenanigans of speculators and large investors if he dips his toe in those shark-infested waters.

Every day when we listen to the news, we’re just being treated to more of the proven fallacy of trickle-down economics. When the rich get richer — surprise! — the poor and middle class don’t benefit at all.