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One Year Into The Pandemic, Here's What We Can Learn From The Stock Market

SCOTT DETROW, BYLINE: We're going to spend a few minutes talking about the stock market. For many Americans, our savings and retirement partially depend on it. So what can we learn from the stock market's stunning highs and lows during the pandemic? Think about it. Last March, COVID-19 fears triggered one of the worst stock market crashes in history. The Dow fell 26% in just four days. Fast-forward to now, a year later. The Dow and the S&P 500 hit record highs yesterday after President Biden signed his COVID relief package into law. The rebound is astounding, historic and also pretty confusing.

We spoke with economist Megan Greene last March during the meltdown. She is a senior fellow at Harvard's Kennedy School of Government, and she joins us again one year later. Megan, good morning.

MEGAN GREENE: Hi.

DETROW: So thinking back to this week last year, what would you have thought if someone told you where the markets would be a year later?

GREENE: I would have been surprised, and I particularly would have been surprised by how quickly it turned around. So we've hit new highs, but actually, the markets only tanked for a matter of days/weeks before the central bank, the Federal Reserve, stepped in. And that really sparked the rally. And the Federal Reserve stepped in really quickly, much faster than they did after the global financial crisis. So that turnaround was stark, and I never would have predicted that.

DETROW: So was it just that intervention and the fact that Congress made it clear they were going to spend trillions and trillions of dollars more than anything else, or were there other aspects going on?

GREENE: So I think it was both of those things. I think the biggest factor really was that the Federal Reserve stepped in. I mean, the equity market rally started the day after the Federal Reserve said that they would buy up corporate debt, which I had asked officials at the Federal Reserve if they would ever consider doing that the previous October. And they looked at me like I had 40 heads. It was just not on the table.

So they started launching programs that no one ever would have expected them to launch. But on top of that, I think the composition of our markets affected it. So the stocks that really did well in this were tech stocks and health care stocks. And actually, that's not so unreasonable. You would think in the middle of a pandemic, when we're all on Zoom calls and I'm doing this interview remotely and we're all looking for a vaccine, that tech stocks and health care stocks would do really well. But it turns out they're about 25% of the weight of the overall S&P 500 index. So if those stocks do well, it really pulls up the whole index.

DETROW: 'Cause I think, you know, as many times as we can say, the stock market is not the economy as a whole, it was still confusing at times. The news had been so continually grim. And you look now - and even as we see things getting better, unemployment is still bad. There are big sectors of the economy that are still really suffering. And yet, Wall Street is booming.

GREENE: Yeah, that's right. And it is important to highlight that the stock market is not the economy, so Wall Street and Main Street are not necessarily connected. But like I said, the fact that the stock market was booming didn't necessarily reflect and still doesn't necessarily reflect an incredibly bullish view on behalf of investors about things like the labor market. It reflects the fact that investors believe that the central bank has their back and that the certain stocks that have an incredible weight in the index will do well.

So it doesn't mean that every industry will do well. It means these important industries, tech and health care, will. And that drags the average up pretty significantly. And it's not a reflection of the labor market, though I think this recent high is partly driven by the stimulus package, the $1.9 trillion that have been passed and how that should actually help heal the economy.

DETROW: A lot of money going to a lot of Americans and a much broader swath of Americans than previous relief packages. What do you make of the inflation concerns, though?

GREENE: Yeah, this is the biggest question in economics right now. And the concern is that usually when you're designing a fiscal stimulus plan, you figure out the size of the hole, and then you try to fill it exactly. And this time around, we're filling the hole five times over, so that could overheat the economy and feed through into inflation. But, you know, in the last crisis response, we were worried about inflation, and we never got any. And if you keep all of the spending at home, that's one thing that would be inflationary. But a lot of it will probably seep out. So if you use your stimulus check to hire a personal trainer in the U.S., that could be inflationary. But if you use it to buy a Peloton from Taiwan, that wouldn't be inflationary. So this is the biggest question. And I think a lot of it will seep out, but we could get some inflation.

DETROW: Economist Megan Greene at Harvard's Kennedy School of Government. Thanks so much.

GREENE: Thanks for having me. Transcript provided by NPR, Copyright NPR.