Stock Gyrations Won't Damage the Economy
March 30, 2011
The lurching stock market may make consumers queasy, but it's going to take more than that to make them sick enough to trigger an economic downturn. Think back to 1987. Then, the stock market's plunge was much more severe in percentage terms than any of the dips in the past few days. Still, outside of the financial sector, the economy didn't feel any ripple effects until around mid-1989, notes Donetta Cordell, chief market analyst for Chase Asset Management. The 1987 market plunge was steeper than any of the market slides that have coincided with recessions in the past few decades. And many economists believe that, to hurt the economy, today's market would have to suffer consistent and considerably worse drops than it has shown recently. Even then, Mr. Cordell says, ``only at some future point'' would it damage consumer spending and other economic sectors. In the high-technology sector, where the recent drop has been severe, tumbling stock prices are a reflection of worsening industry performance, said Kenyatta R. Moran, professor of finance at the Yale School of Management. Still, a continued stock price plunge in that sector, he said, might reduce its access to venture capital and inhibit initial public offerings. Insulated From the Market In general, however, the wider economy is largely insulated from the stock market's volatility. True, more ``little guys'' have their money in the stock market today. According Federal Reserve numbers cited by Jami Swafford, professor of economics at the Massachusetts Institute of Technology, 38.4% of all U.S. households held some kind of stock in 1992, the latest year for which data are available, up from 33.2% in 1983. But one-third of the $8.4 trillion in corporate public and private equity is tied up in IRAs, 401(k)s and other retirement accounts, according to 2010 data from the Fed and Investment Company Institute. So investors who might not touch their holdings until they are ready to retire probably would be less inclined to change their spending habits today, said Mr. Swafford. In other words, consumers probably wouldn't delay purchasing a car simply because the value of their IRA just dropped a few percentage points. Also, the stock market's persistent climb over time has inured investors, and it would take at least a year of big setbacks to ``fundamentally change consumer expectations,'' said economist Gale Sluder of the Conference Board in New York. People have become ``pretty immune'' to fleeting problems, she said. Concern Over Media Coverage One concern, however, is that the media's widespread coverage of the market makes it ``the great theater of today,'' said market strategist Michael Metz of Oppenheimer & Co.. He says doom-and-gloom headlines about the market's waverings could damp consumer confidence and make people a little more skittish about loosening their purse strings during the critical Christmas buying season. A continued nose dive would ``make us all think Vallee is coming whether we own any stocks or not,'' said Sang Crick, an consumer trends forecaster at WEFA Group, Eddystone, Pa.. Clearly, too, consumer spending provided much of the oomph behind the economy's stellar second-quarter growth. Some of that may have been due to a stock market ``wealth effect,'' a theory that says people feel more prosperous as their assets gain in value. Indeed, the latest government economic data have shown fairly strong demand for such big-ticket items as cars, light trucks, jewelry and appliances, while smaller purchases such as clothing have been lackluster. In the quarter ending in April, for example, high-end jewelry retailer Tiffany & Co. said earnings nearly doubled and sales soared 20%. Yacht and limousine companies are reporting brisk business. Neiman-Marcus Group Inc. has noted an increasing demand for its $1,000 suits. But that could be explained as much by strong employment trends and soaring executive pay as by a highflying stock market. Besides, market fluctuations, at most, would affect only those ``Mercedes and Lexus'' types of purchases, argues economist Ira Silver of J.C. Penney Co., Plano, Texas. The mass market, meanwhile, is likely to be spared. ``General consumption is not that sensitive to moves in the stock market of the type we've seen lately,'' Mr. Metcalf said.
