As stock prices hit record high, economy trails behind

Are stocks divorced from reality or reflecting it?

VBI Vaccines has lost money in each of the four years it has been listed on the Nasdaq stock exchange and last month told investors not to expect that to change anytime soon. Yet, since its mid-March low amid the pandemic-related shutdown, the company’s share price has rocketed by more than 450 percent.

The jump comes even as VBI’s candidate for a vaccine for the coronavirus remains in the earliest stage of development, trailing well behind alternatives from bigger and better-known rivals that already are being tested on humans.

At first glance, VBI — which was almost dropped from the Nasdaq last year after its share price languished below $1 — looks like a perfect example of how the stock market has become detached from the reality of a bruised and battered U.S. economy. Stock prices reached a fresh all-time high on Tuesday, despite a double-digit unemployment rate and the collapse in recent months of perhaps 100,000 small businesses.

The Standard & Poor’s 500-stock index — the best-known broad market gauge — has risen more than 50 percent since March, completing the fastest rebound from a bear market in history. President Trump has repeatedly celebrated the market’s performance, saying it represented an endorsement of his agenda and warning that a Democratic victory in November would cause stocks to “go down like a rock.”

Prominent lawmakers including Sen. Bernie Sanders (I-Vt.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) cite the apparent disconnect between financial markets and the real economy as evidence of a malfunctioning capitalist system.

A closer look at both VBI and the broader stock market, however, suggests that Wall Street is neither a proxy for the real economy nor a financial casino entirely divorced from the lives of everyday Americans.

“The idea that the stock market is the economy and the economy is the stock market — the correlation between the two is tenuous, at best,” said Barry Ritholtz, whose N.Y.-based firm manages $1.5 billion in assets.

There is more to the tiny biotech company than red ink and long-shot projects. And though soaring markets may seem at odds with the ailing economy, their inner workings show that investors are distinguishing between industries that have been crushed by the pandemic and those that are poised to prosper.

As Americans in recent months traded traveling for digital connections, for example, the value of United Airlines fell by roughly one-half while shares of Nvidia, a maker of computer chips for gaming devices and data centers, almost doubled.

“There’s always a difference between the market and the economy,” said Howard Silverblatt, senior index analyst for S&P Dow Jones Indices in New York. “We’re up because we’re looking past 2020 and looking at 2021.”

In VBI’s case, both the company and independent analysts say recent achievements support its share price rise. The Cambridge, Mass.-based company earlier this month received $56 million in funding from the Canadian government, which is backing its research into a vaccine for covid-19 and two other coronaviruses known as SARS and MERS. The cash infusion came a few months after VBI raised $57 million in an April stock offering.

Source: https://www.washingtonpost.com/business/2020/08/18/stocks-economy-coronavirus/