Investing in stocks can have a significant impact on the US economy as well as individual consumers.
The US economy constitutes a business and financial investing, government investing, consumer spending and labor. Stock prices can drop or increase. While focusing on the positive is a good thing to do, a major impact on the economy results from drops in stock prices. Economic disruption can result from a collapse in stock prices.
However, daily price movements in the stock market can have little to no impact on the economy than we expect. The stock market is not a real economy, and should not be confused as one. Stock prices change because of many reasons, which can be over-valuation corrections and even big drops in stocks do not always result in lower economic growth.
In the past, there have been cases where falling stock prices have led to a stock market crash and consequently a recession. A good example is the 2008/2009 recession. However, there have been many times when the stock market has crashed and not led to a recession. To determine the direction of the stock market, investors and traders use technical indicators to analyze the market. Even though falling prices make headlines and raise concern, you need to know if you should worry and how this affects the economy.
It is important to note that increasing stock prices do not always mean the economy is healthy. Below are ways how investing in stocks affects the US economy:
Wealth effect
The main impact that people see after investing in stocks is either a fall or increase in their wealth. If there is a significant fall in stock prices, the financial outlook of investors is in trouble. On the other hand, if the prices have a significant gain, their financial outlook is good. When a stock investor loses money on his or her stock, he or she will be hesitant to spend.
This can lead to a decline in consumer buying and spending. However, this should not be the main focus as people who purchase shares are considerably wealthy and ready to lose their money. Their spending is normally independent of stock prices, especially if the losses are short-term. Because only around 10 percent of households own stocks, the majority of American consumers will not be affected by share prices.
Confidence
Many are the times when stock price movements reflect what is going on in the economy. When there is fear of a potential global slowdown and recession, stock prices tend to fall. The stock market can have a positive or negative impact on consumer confidence. Headlines of declining share prices can discourage spending. However, there are cases when the stock market can appear misaligned with the economy. For example, in the thick of a recession, stock prices may increase due to investors anticipating recovery after a year or two.
Investment
Declining share prices can affect a company’s ability to raise funds on the stock market and the opposite is true. Companies that want to grow and need to borrow money attain this by issuing shares. This is a cost-effective way of obtaining funds. However, falling stock prices make it difficult for them to raise funds and invest in their expansion. In addition, potential investors shy away from investing in a low-value share.
Bond market
Prolonged declines in the stock market make alternative investments more attractive. Due to fear of losing their money, investors may offload their shared and invest in gold or government bonds. This is because government bonds offer better returns when the market is uncertain. However, there are times when the government bonds market affects the stock market. Concerns in the bonds market could lead to a decline in the stock market.
Effect on pension
The stock market indirectly affects people with investment trusts or private pensions. The stock market is the main area of investment for pension funds. If the stock market crashes, pension funds drop in value. This could lead to lower pension payouts. A pension fund might struggle to fulfill its promises if stock prices suffer a big drop. Stock prices are important when it comes to long-term movements. The stock market can determine whether you will get a low or high pension income and whether you have to look for other ways to save for retirement.