Trouble on Wall St. : Falling Stock Prices Certainly Don’t Help Consumer Confidence
Tumbling stock prices give consumers yet another reason to sigh over the state of the economy, and even those only vaguely familiar with investing grip their wallets a little tighter when the market takes a nose dive.
The Dow Jones industrial average fell more than 100 points in early trading Monday after having lost 53 points on Friday. The index--the best-known measure of stock market activity--recovered substantially to end Monday’s session with a 21-point decline.
Its initial drop is sure to stun Americans in ways that daily five- or 10-point losses simply do not.
Consumers are likely to shrug off big declines if stocks turn around in subsequent sessions, attributing the drops to quirky “market volatility.”
But it would be a mistake to underestimate the market’s ability to affect attitudes. “The stock market traditionally has influenced consumer confidence,” said Raymond Stone of Stone & McCarthy Associates, an economic consulting firm in Princeton, N.J.
The vast majority of consumers do not own shares of IBM or General Electric, but many have ties to the stock market through mutual funds, pension funds and profit-sharing plans that invest in equities.
Yet even if consumers are not direct investors in the market, the Dow’s fluctuations influence the way they perceive the future and the way they ultimately spend their money, economists say.
“People see the Dow and use it as a barometer of overall economic activity, and in a period where they’re already feeling insecure about their jobs, (a sharp drop) will make them feel more insecure,” Stone said.
The question is whether the recent weakness in the stock market is reflective of a fresh--and more negative--assessment of the economy or is merely a “psychological blip,” as Stone called it.
Evidence that the economy is stagnating has mounted anew over the last week as September statistics began rolling out. But there was no specific new data to drive the market Monday.
Investors have begun to reason that if the economic recovery has yet to take hold, corporations will find it harder to post profits, and without the promise of black ink, stock prices start looking overvalued. Hence, investors take the money they’ve already made from stock gains and sell.
Consumers see this and become more pessimistic about the stock market--and by association the overall economy. And they become less and less likely to do the things needed to speed the pace of recovery, such as buying goods and borrowing money.
“Typically in an economic recovery, people feel good enough about their prospects and their neighbor’s prospects that they borrow money and spend more than they make--they buy cars and houses and furnish them,” said Alan Levenson, a financial economist at WEFA Group in Bala-Cynwyd, Pa.
“To get the kind of growth rates we associate with recovery, that’s what it’s going to take,” he said.
It’s a vicious circle, one that will only be broken by better economic news.
“A lower unemployment rate or higher personal income” are the kinds of things that will turn consumer confidence around, said John Sebastian, an executive vice president at Chicago-based Clayton Brown & Associates.
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European Markets: From Bad to Worse
European stock markets, still reeling from the currency crisis in September, now face the prospect of further economic weakness even as interest rates stay high--a prescription for more selling, experts say. How key markets fared Monday:
London: The Financial Times 100 index plunged 103.40 points, or 4.1%, to 2,446.30, the biggest decline this year.
Paris: The CAC 40 index plummeted 72.30 points, or 4.3%, to 1,611.04, lowest since Feb., 1991.
Frankfurt: The DAX 30 index slumped 53.64 points, or 3.6%, to 1,424.40.
Zurich: The SPI index tumbled 40.60 points, or 3.6%, to 1,098.00.
Milan: The MIB General index sank 16 points, or 2.2%, to 706.
Stockholm: The I-Topp blue chip index collapsed 42.86 points, or 6.1%, to 659.05.
Source: Knight-Ridder Tradecenter
Wall street’s Wild Day
The stock market plummeted early in the day, keying off an overnight plunge in European markets and growing pessimism about the U.S. economy. But buyers reappeared in the afternoon, lifting the Dow from a loss of 105 points to a mere 21.61-point decline by the close.
