Big public companies in the U.S. aren’t particularly representative of American businesses at large. For much of the pandemic, that has been a blessing for the stock market. In the months ahead, it could be a curse.
A quick look through the companies in the S&P 500 shows that a lot of them are in the business of making and selling stuff. Out of the 500, 216 are classified as manufacturers or retailers. But Commerce Department data show that manufacturers and retailers account for only about one-sixth of private U.S. firms, and Labor Department data show they account for a little more than one-fifth of private-sector jobs.
Further, manufacturers and retailers accounted for about half of S&P 500 sales last year, according to FactSet estimates. But over the first three quarters of last year, Commerce Department figures show that the two sectors accounted for under one-quarter of seasonally adjusted private-sector sales, as measured by gross output.
The stock market’s outsize focus on goods has made it a major beneficiary of the economic shifts brought as a result of the pandemic. Unable or unwilling to partake in activities such as going out to restaurants or taking trips as much as they did before Covid-19 struck, Americans bought more stuff instead. This was compounded by the fact that inflation has been concentrated in the goods sector. Thursday’s report on gross domestic product showed that in the fourth quarter final sales of goods—that is, what the ultimate purchasers of stuff, whether they were consumers, businesses or governments—was 17.5% higher than two years earlier. Final sales of services were up 5.8% over that period.
As a bonus, the weakness in the services sector led the Federal Reserve to keep monetary policy very easy for a long time—a development that benefited the makers and sellers of goods and their share prices.
Moreover, many of the services companies that are in the S&P 500 were better insulated from the effects of the pandemic—or even benefited from them—than services businesses at large. Netflix, which has benefited from all the time people have spent streaming movies and shows, is classified as a services company. So is United Parcel Service, which has been delivering lots of goods to people’s doorsteps. On the other hand, the food services and accommodation sector, which took some of the hardest hits from the pandemic, is underrepresented in the stock market relative to the economy.
So what might happen in the year ahead, if the pandemic loosens its grip and a greater share of spending shifts to the services sector as a result? Historically, when services spending seriously outpaces spending on goods, the stock market has often struggled as happened in the early 2000s, for example, when the S&P 500 declined for three years in a row.
It isn’t clear the past offers much of a guide, however, since periods of weakness in goods spending relative to services spending have usually been associated with weakness in the economy at large. On the other hand, the fact that the Fed looks as if it will soon be raising rates—something it typically doesn’t do during periods of economic weakness—is an additional reason for stock investors to be concerned.
A shift in spending away from goods might not be a good thing for the stock market.
Write to Justin Lahart at justin.lahart@wsj.com
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Appeared in the February 1, 2022, print edition as ‘Fewer Goods Don’t Help Stock Prices.’
