The stock market isn't the economy, but the distinction is getting harder to draw.
The fates of Wall Street and Main Street have never been so intertwined with household ownership of stocks scaling new heights and the fate of innovative tech companies tied to their share prices.
The stock market going through a volatile period is not sending a good sign for the growth outlook.
Joseph LaVorgna, chief economist for the Americas at Natixis, said that the financial economy has grown significantly in the last 20 years. That is no longer the case.
No one would argue that the stock market is all of the economy, but it is also hard to argue against the idea that it has become a larger part of everyday life.
According to data from the Federal Reserve, the share of household wealth that comes from directly or indirectly held stocks has more than doubled in the last 30 years. A host of factors, from the advent of online trading to stock-friendly monetary policy to a lackluster global economy, has made U.S. equities an attractive place to park money and earn nice returns.
It made the economy more vulnerable to shocks on Wall Street.
LaVorgna, who was chief economist for the National Economic Council under Donald Trump, said that when risk assets fall and fall fast, there will be a negative impact on growth.
The market and economic growth are connected by a transmission mechanism.
People tend to curtail spending when stocks fall. When compared to future earnings, share prices are less attractive because of the decline in spending. The market reaction spills back into less wealth on consumer balance sheets.
Silicon Valley firms need to raise capital and look to growth in their stock prices in order to do so.
The market affects investment decisions by companies, particularly high-growth companies, that rely on raising capital through the equity market to finance their growth.
It is more difficult to raise equity if stock prices are down. They are not going to be able to expand as aggressively because of the higher cost of capital.
Companies have to find a way to cut costs if revenue growth gets weak.
They usually look at payrolls.
If the current market tumult continues, the steady rise in employment can come to an end.
Companies manage their share price and they want to make sure that projections remain intact as best they can. The main cost of capital for most companies is labor. That is one of the reasons why the Fed has to watch this.
The markets and the economy are linked by the Federal Reserve.
Following the 2008 financial crisis, monetary policy has relied on risk assets as a transmission mechanism. Since then, the Fed has bought more than $8 trillion in bonds in an effort to keep rates low and the movement of cash through the economy.
The Fed has put consumers in the equity market. We have seen a big correlation between equity prices and discretionary spending.
Some of the froth from Wall Street might not be a problem for Fed officials.
The main problem for the central bank is inflation, which has come from supply that has been unable to meet consumer demand for goods over services. The markets have been in sell-off mode since Thursday, the day after the Fed announced a 50-basis-point rate increase that was the biggest hike in 22 years.
The Fed is going to start selling some of the bonds it has accumulated, a process that directly affects Wall Street but also finds its way to Main Street through higher borrowing costs.
The market and economy are not the same, but they are joined at points. As the market pulls back, the assumption is that it can help curtail demand, which is one of the things they want. They want to slow the economy.
The current downturn in the S&P 500, which has fallen about 15% year to date, should not be used as a signal of a recession.
Most Wall Street economists think GDP will grow at a slower pace through the end of the year, even though it fell at a 1.4% pace in the first quarter.
The market is a good indicator of where the economy is headed, but it overstates the case. It is probably getting ahead of itself in that regard.
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