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The stock market’s strength tells us less about the true state of the economy than at almost any other time over the last five decades

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CHAPEL HILL, N.C. — We can stop debating whether the stock market has become more disconnected from the economy.

It undeniably has, according to a just-completed academic study by Rene Stulz, a professor of banking and monetary economics at Ohio State University, and Frederik Schlingemann, a finance professor at the University of Pittsburgh. But don’t blame this growing disconnect on the COVID-19 pandemic; the professors show that the trend toward a greater disconnect dates back at least five decades.

Prior to this study, the debate about the stock market-economy disconnect had generated more heat than light. As usual in this day and age, it had become intensely politicized. On the one hand, many found it obscene that the stock market
SPX,
+1.64%

  could be hitting new all-time highs in the wake of record unemployment. They argued that the market’s
DJIA,
+0.87%

  strength tells us nothing about the economy and everything we need to know about how our political system rewards the upper classes.

On the other hand, many others argued that, since the stock market’s level — in theory — is a function of anticipated future corporate earnings growth, there is nothing particularly surprising about its disconnect from what is happening contemporaneously. Those in this camp therefore celebrate every stock-market rally as evidence that President Trump’s economic policies are working.

The professors respond to this debate by arguing that it can’t be resolved theoretically. As they write in the study: “How much the stock market reflects the economy is an empirical question.”

They focus on several measures, but perhaps the easiest to understand is the proportion of total employment that comes from public companies. At the start of the professors’ sample in the early 1970s, 41.4% of non-farm workers in the private sector were employed by publicly traded corporations. In 2019, this had fallen to 29.0%.

Notice that even in the early 1970s less than half of non-farm private employment in the U.S. came from publicly traded companies, and that this proportion has declined only modestly since then. So the stock market-economy disconnect is not entirely a new phenomenon.

This conclusion was reinforced by what the professors found upon digging into the data more deeply: The long-term trend toward a greater disconnect has not followed a straight line. In fact, they found that the current disconnect is not even the highest it’s been over the last 50 years.

Consider an “employment unrepresentativeness measure” that the professors created, which reflects the degree to which a company’s market capitalization share of the total market differs from its share of total employment. This measure would be low if the publicly traded company that employed the most people also had the greatest market cap, and so on down the line. Higher readings therefore would indicate greater “unrepresentativeness” — a greater disconnect, in other words.

The chart at the top of this article plots the professors’ employment unrepresentativeness measure. Notice that while the current reading is higher than in the 1970s, it isn’t as high as what was registered at the top of the internet bubble.

There are both shorter-term and long-term factors at work here, according to the professors. The shorter-term factor is the market’s valuation: The stock market-economy disconnect increases as valuations become more stretched. This is an ominous finding, given that their employment unrepresentativeness measure is now higher than at any other time except the top of the internet bubble.

The longer-term factor, according to the professors, is the shift away from manufacturing toward a high-tech economy. As a general rule, high-tech companies employ fewer people than do manufacturers. The company currently at the top of the market-cap ranking—Apple
AAPL,
+6.35%

 — has 137,000 employees, according to FactSet. In contrast, when General Motors
GM,
+0.15%

 was at the top of the market-cap rankings five decades ago, it employed more than 600,000 people.

The bottom line: There is a widening stock market-economy disconnect. Stock-market strength tells us less about the true state of the economy than at almost any other time over the last five decades. And that’s not a political belief, but a statement of fact.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.



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My boyfriend inherited a home and $700K. He pays me $500 monthly rent. Should I ask him for $86K to pay off my condo?

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Dear Quentin,

I have lived with my boyfriend in my home for over 20 years. We never married, and I have three siblings. I also own another condo in the Caribbean, which I paid for myself.

My boyfriend inherited a home from his dad in the South and a large sum of money, just over $700,000. We just got back from this inherited home. He is still deciding if he/we should keep it.

I owe $86,000 on my current home, and my boyfriend pays me $500 a month rent and he pays the electric and cable bill. We also mutually share groceries. I appreciate all his financial help.


‘His ex-wife will get half of his pension and Social Security in Connecticut. I will not receive that as we were never married.’

I am 65 and get a monthly pension of $800 and receive $1,800 Social Security every month.Together, we own three condos. I have no savings, and own two properties.

He is divorced with six adult grown children. I have only met two of his children out of the six. For some reason, he does not want to get involved with their cookouts and parties etc.

He is close with his children, and speaks to his ex-wife on the holidays as needed about any of the children and grandchildren. We always travel alone. His children never travel with us.

His ex-wife will get half of his pension and Social Security in Connecticut. I will not receive that as we were never married. What should I do financially to secure my future?

Should I ask him to pay off my condo balance of $86,000, and promise to leave the condo to him rather than my siblings in my will?

He does not want to get married, for some reason; he was married once and he said he does not want to do it again.

The Girlfriend

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Dear Girlfriend,

Your offer assumes that you will predecease your boyfriend, and that is not a given. If you do not die before he does, he is essentially giving you $86,000 because (a) partners should help each other out, (b) he has newfound wealth and he should spread it around, and/or (c) it’s not fair that he should have all of this dough landing in his bank account when you have had to scrimp and save all of these years. It has a faint ring of that school-days refrain, “If you give me one of your sweets, I’ll be your best friend.” In this case, you already are his best friend. So there’s no upside there.

You have been together for 20 years and you never married. The reason for that may be at least partly related to your respective financial affairs. Your boyfriend has a lot of financial responsibilities, one home (at least he had one home before his latest windfall), children, and an ex-wife, while you have two homes, and are free of your partner’s other financial burdens. He also pays you $500 rent every month, which was obviously a convenient arrangement for both of you. But it seems late in the day to draw a line connecting his financial future, that of his ex-wife’s and your own.

Sometimes, it’s good to ask for help. People often want to help, and it’s a privilege to help out a loved one. But to ask him for a chunk of his inheritance to pay off your home, especially when you have another condo in the Caribbean that you could sell, seems bad timing at best, and opportunistic at worst, which brings us back to the “I’ll be your best friend” sentiment. You are effectively asking your boyfriend for something with nothing in return. By not marrying, you have kept your finances separate. You have gotten this far on your own. There is a lot to be said for that.

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My ex-wife passed away. I’m the beneficiary on her life insurance. Her family wants me to pay her funeral expenses and won’t leave me alone

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I am 32, and just a month ago I found out that my ex-wife, whom I haven’t spoken to since we divorced, passed away tragically in a moped accident. My ex-wife had life insurance through her job. My ex-mother-in-law informed my father that my ex-wife had kept me as her beneficiary on her life-insurance policy, and her family wants the money for funeral costs, bills, etc.

Not only did my ex-wife have me on her policy as the primary (and only) beneficiary, she updated my home address on the policy after we divorced. Also, I found out through the insurance company that my ex-wife had two term life-insurance policies, one for me and one for my ex-sister-in-law.

I blocked my ex-in-laws, and now I received a threatening voicemail from a blocked number, so I’ve taken it upon myself to notify the authorities. I live in New York, I am remarried, and my divorce was very simple and easy. We left the marriage with what we came into it with. The life-insurance company approved the check in my name, and is sending it to my home.

Am I legally in the clear? I have not spoken to or bothered these people once since we divorced five years ago. I just want to be left alone and move on with my life.

Thank you very much in advance.

Best regards,

Fed-Up Ex-Husband

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Dear Fed Up,

First, I’ll deal with your life insurance concerns, and then the subject of your ex-wife’s funeral expenses.

The life-insurance policy was between your ex-wife and her insurer. It’s possible to overturn a life-insurance policy if it explicitly goes against the terms of a divorce decree, as happened in this case, but that too was a complicated lawsuit. Some states do have statutes that can revoke such beneficiary arrangements.

In “Kaye Melin and Metropolitan Life Insurance,” the children of the deceased were awarded the proceeds from the life-insurance policy, not the ex-wife who was named as beneficiary on the agreement. In that case, the law presumed that what her ex-husband wanted after their divorce was incorrect.

The ruling stated: “Thus, if a person designates a spouse as a life insurance beneficiary and later gets divorced, Minnesota law provides that the beneficiary designation is automatically revoked. At least twenty-eight other states have enacted similar revocation-upon-divorce statutes.”


‘I’m reluctant to say that you are ‘in the clear,’ given previous court rulings, and statutes in some states on the revocation of named beneficiaries post-divorce.’

I’m reluctant to say that you are “in the clear,” given previous court rulings, and statutes in some states on the revocation of named beneficiaries post-divorce. In your case, it seems clearer that your ex-wife wanted you to be the beneficiary. She did, as you say, update your address. It would be hard to see a more explicit sign of her intentions than that.

“Unless the policyholder of the life-insurance plan changes the beneficiary designation officially, the people originally named will remain the beneficiaries through the life of the policy,” according to Heban, Murphree and Lewandowski, a law firm in Toledo, Ohio. “Even if the policyholder was not on speaking terms with the individual upon his or her death, that beneficiary would still receive the income.”

“In the case of someone who divorced and remarried, the policy may name the first spouse as beneficiary. If the policyholder never changed the policy to reflect the divorce and remarriage, the ex-spouse could end up with the benefit. This can cause the current spouse and any children from the second marriage to dispute the beneficiary designation on the policy,” it adds.

But much, I suspect, would depend on what state you live in, and the specifics of your case.

On a separate issue, it’s difficult to glean from your letter whether your in-laws had little funds to pay for the funeral expenses, or were mad as hell that you were listed as beneficiary and felt you should contribute, or both. On the one hand, it seems like they are not in a state of mind to be reasonable and, chances are, if you did engage it would lead to further demands and acrimony.

Perhaps you could talk to your ex-wife’s lawyer and see if there is enough money to cover the costs of her funeral and, if not, you could make a contribution. But given the alleged harassing phone calls, their anger and grief, and their antipathy toward you, you would need to have all correspondence go through the attorney and refrain from any direct communication.

There is no excuse for their taking their grief out on you. Still, spare a thought for her family. If you are fed up, imagine how they feel.

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These money and investing tips can help you when inflation is burning a hole in your wallet

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Don’t miss these top money and investing features:

These money and investing stories, popular with MarketWatch readers over the past week, focus on helping you make sense of the recent spike in U.S. inflation. Understand how rising prices can affect your investment portfolio, and taking appropriate steps now to respond, can prevent unpleasant surprises later.



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