Until recently, the stock market seemed to defy gravity, producing double-digit returns that gave many Americans financial comfort even as everything else crumbled around them.
Posted at 1:00 p.m.
When the pandemic began to upend society, the market sank for a few weeks and then saw one of the biggest rallies in history. Stock prices rose the day rioters swarmed the US Capitol, and they rose during the week when protests rocked many US cities following the killing of George Floyd. During this period of great turmoil, the market seemed to send mixed signals that things were going to work out – at least, economically.
But real-world problems ultimately ruined the stock market party. Soaring inflation, fueled by rising food prices and the war in Ukraine, prompted the Federal Reserve to raise interest rates significantly for the first time in many years, sending stock prices plummeting. shares.
Stocks rose 2.4% last Friday, but not enough to offset a week of declines. It was the sixth consecutive week of losses for the stock market, the first time it has happened since 2011. The S&P 500, which is flirting with a bear market, down 20%, has lost more than 16% since its January peak. It could fall further as inflation persists and a recession looms.
Even after the bleeding stops, stock market investors, who make up more than 50% of Americans, could face years of relatively low returns that would leave them with far less money to pay for their children’s college education. and support themselves in retirement.
The questioning comes months before the midterm elections, compounding the problems for Democrats, who are already struggling to convince voters that their party and President Joe Biden are leading the economy in the right direction.
Former President Donald Trump has often taken credit for the meteoric rise in the stock market. Now, Mr. Biden and his party will almost certainly take some of the blame for his recent downfall.
In reality, the stock market is not a perfect measure of the real economy. Unemployment is low and consumer spending is holding up, but more than a month of punitive losses can damage the country’s financial psyche.
“People view the stock market as a barometer of the economy and their financial condition,” said Mark Zandi, chief economist at Moody’s Analytics. “They feel good when they see green on the screen and bad when they see red. »
The years of low rates have been rocket fuel for stock prices, in part because other investments, like bonds, that are tied to interest rates are producing minimal returns. The stock market became one of the few places where investors could make a lot of money.
During the pandemic, rates were even lower as policymakers sought to support businesses and consumers during shutdowns, and it worked. Investors flocked to the companies’ stocks and kept them afloat, allowing them to continue to hire staff, pay rent, increase production and, of course, reward shareholders by paying them large dividends and buying back shares from them.
But inflation, which places a heavy burden on families trying to make ends meet, has also contributed to dampening market sentiment. Steadily rising food costs and record high gasoline prices prompted the Fed to raise rates and attempt to slow the economy.
Wall Street has been expecting this moment to come for a long time. But the market reaction – which some call a “reset” and others a necessary “retribution” for equity investors – is no less painful.
“I don’t think people realized how shaky the foundations on which the stock market was built,” said Emily Bowersock Hill, founder of Bowersock Capital Partners and chair of the investment committee of the Kansas Public Employees Retirement System, a fund pension of more than 20 billion dollars.
Virtually no stock was spared from losses. The market decline “is not ending, and it’s depressing”, says Mme Hill.
A Game of the Rich
While a majority of Americans have invested some money in the stock market, it remains a game for the rich. According to an analysis by Edward Wolff, professor of economics at New York University, the richest 5% of Americans own 72% of all stocks.
But the symbolic value of the stock market is important. “It’s the only story that makes the headlines every night,” says Richard Sylla, professor emeritus of economics at New York University’s Stern School of Business.
Is the market up or down? Are we winning or losing today, this week, this year, this presidency?
Last Friday, the University of Michigan consumer sentiment index fell lower than expected, a decline that some economists attribute in part to stock market losses. The index is now 13 points below the low reached during the first wave of COVID-19, observed Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics. Such deep pessimism “suggests that people have short memories,” he wrote in a research note.
It also portends trouble for the Biden administration. Not only is the stock market party ending under Mr. Biden’s watch, but it could also be a while before another is launched.
Many analysts are expecting single-digit annual returns, around 5%, for the next few years – a huge disappointment compared to the average annual return of around 17% that the S&P generated in the decade leading up to the beginning of this year.
“If there’s one good thing to be said about the stock market having its revenge, it’s that people who haven’t been treated so well by this economy might rejoice a bit in the misfortune of others, notes Mr. Sylla. After years of the rich getting richer and the poor getting poorer, now no one is going to get much richer from stocks. »
Mme Hill sees no easy steps Mr. Biden could take to control inflation, which worries investors and contributes to market malaise.
Trying to rein in wage growth — a driver of inflation — would be politically unpleasant for a Democrat, and the war in Ukraine, which is driving up the price of oil, natural gas and commodities, like wheat, looks like it could. last a while.
Although retirement and investment professionals braced for a period of significantly lower returns, Zandi says it was likely to come as a shock to casual investors, who expected their nest egg to retirement is increasing at a rate they took for granted.
“The average American household probably didn’t think of it that way,” he says. Most people may think of future returns as those they had in the recent past. They will be surprised. »
This article was originally published in The New York Times.