The stock market seemed to defy gravity until recently, producing double-digit returns that provided many Americans with financial comfort even as everything else crumbled around them.
The market sank for a few weeks and then recorded one of the greatest rallies in history after the Pandemic began. During the week after the murder of George Floyd, riots broke out in the U.S. Capitol and stock prices rose. The market seemed to show a contrarian signal that things were going to be okay.
The stock market has crashed because of real world problems. The Federal Reserve has raised interest rates for the first time in many years because of soaring inflation and the war in Ukraine, which has caused stock prices to plummet.
It wasn't enough for stocks to make up for a week of declines. It was the first time in four years that the stock market had lost six weeks in a row. The S&P 500 is down more than 16 percent since its peak in January, flirting with a bear market. As inflation continues and a recession looms, it may fall further.
Even after the bleeding stops, stock market investors, who include more than 50 percent of Americans, could face years of relatively meager returns that will leave them with substantially less money to pay for their children's college education and support themselves in retirement.
The Democrats are struggling to convince voters that they are steering the economy in the right direction, and this reckoning comes just months before the elections.
The stock market's rise was often credited to Donald J. Trump. Mr. Biden and his party will take some of the blame for the recent fall.
The stock market isn't a perfect measure of the real economy. Unemployment is low and consumer spending is holding up, but more than a month of punishing losses can damage the country's financial psyche.
The stock market is a good indicator of the economy and how people are faring.
Years of low rates have been a boon for stock prices, partly because other investments, like bonds, that are pegged to interest rates, produce minimal returns. The stock market was one of the few places where investors could make a lot of money.
Rates went even lower as policymakers tried to support businesses and consumers through the shutdowns. The companies were able to keep hiring, pay rent, and increase production because investors kept them flush with capital.
The market's mood was killed off by inflation, which puts a heavy burden on families trying to make ends meet. The Fed tried to slow the economy by raising rates because of high food and gasoline prices.
Wall Street has been anticipating this moment for a long time. The market's reaction, which some refer to as a "reset" and others as a "comeuppance" for stock investors, is what the market is reacting to.
"I don't think people realized how fragile a foundation the stock market was resting on." said Emily Bowersock Hill, founder of Bowersock Capital Partners and chairwoman of the investment committee of the Kansas Public Employees Retirement System.
Ms. Hill said that some of the declines were good for the market because they were clearing out the froth that created the conditions for companies with questionable business prospects.
Since the start of the year, the share prices of companies that represent innovation and the future have sunk, as investors rethink those companies.
No stock has been spared from the losses. The market decline is depressing, Ms. Hill said.
Mr. Trump understood the emotional symbolism of the market.
In November of last year, Mr. Trump boasted about rising stock prices or publicly pressured the Fed to lower interest rates.
In the early days of the Pandemic, with stores, offices and churches shut, children marooned at home attempting remote school, and morgues running out of space for virus victims, Mr. Trump said that the United States had.
A majority of Americans have money invested in the stock market, but it remains a rich person's game. The top 5 percent of American wealth holders own 72 percent of all stocks according to an analysis by the New York University economics Professor Edward Wolff.
Richard Sylla, a professor of economics at New York University, said that the stock market's symbolic value matters.
The market is up or down. Are we winning or losing this week?
On Friday, the University of Michigan's consumer sentiment index fell lower than expected, a drop that some economists attribute to stock market losses. Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics, said that the index is 13 points below the low when Covid first hit. Mr. Shepherdson wrote in a research note that pessimism suggests that people have short memories.
It suggests trouble for the Biden administration. It could be awhile before another stock market party gets going, as the stock market party is ending under President Biden's watch.
Mr. Sylla, who co-authored a book about the history of interest rates and tracked two centuries of stock market returns, correctly predicted in September 2011 that the coming decade would produce high returns.
What is inflation? Your dollar will not go as far tomorrow as it did today because of inflation. The change in prices for everyday goods and services is known as the annual change in prices.
What causes inflation? It could be due to increased consumer demand. Some developments, such as limited oil production and supply chain problems, can cause inflation to rise and fall.
Is inflation bad? It depends on the situation. Moderate price gains can lead to higher wages and job growth.
Can inflation affect the stock market? inflation can cause trouble for stocks. During inflation booms, financial assets have been bad, while tangible assets have held their value better.
He said that returns in this decade will be less than in the past.
The S&P generated an average annual return of 17 percent in the decade leading up to the start of this year, but many analysts think that will be wiped out in the next few years.
Mr. Sylla said that people who were not well treated by this economy might take a little schadenfreude if there is one good thing to say about the stock market getting a comeuppance.
Ms. Hill said there was a group of investors who had seen a lot of gains in the past five years.
When the market fell a few percentage points, investors got used to buying the dip and betting that the share price would rally and keep going higher. The strategy may not work in the future.
Ms. Hill doesn't think that President Biden can control inflation, which is scaring investors and contributing to the market's weakness.
The war in Ukraine, which is pushing up the price of oil, natural gas and commodities like wheat, seems like it could go on, even if Democrats tried to stop wage growth.
Although pensions and other investment professionals have been preparing for a period of substantially lower returns, Mr. Zandi said it was likely to come as a shock to casual investors.
The average American household doesn't think about it this way. They will be surprised.
The stock market's symbolic value will be diminished with that adjustment.
The stock market has been where the action has been for the last 30 years. It is going to lose its cachet.
Something else will take its place. I don't know what that will be.
William P. Davis was involved in reporting.
All Rights Reserved © 2024
