More people learn the hard way that stock market affects their lives
By Allan Drury
Westchester (N.Y.) Journal News
What happens every day on Wall Street affects virtually every American, rich or poor, even those who — like many of Lewis Mandell's incoming college freshmen — have never bought a share, chatted up a broker or figured out what a price-to-earnings ratio is all about.
Students of Mandell, a finance professor at the University of Buffalo in New York, often tell him their parents invested in the roaring stock market back in the late 1990s to put them through college.
That seemed smart when the Dow Jones industrial average was leaping toward 12,000. But one of the worst bear markets in history has turned that seemingly bright idea into a nightmare of lost savings and diminished hopes. The worry on the students' faces as they talk about this is evident, Mandell said.
The market's swings make people's paychecks swell and shrink. They help convince companies when it's time to hire and fire. They drive interest rates, which determine the monthly payment on that shiny new car or dream home.
The market and the overall economy are like dance partners in the way they play off each other. When the market moves, it can set off a chain reaction of events in the real economy. The health of the real economy, in turn, can ignite buying or selling on Wall Street.
"It has been pretty well documented for 20 or 25 years that consumer sentiment tends to follow the stock market to some extent," Mandell said. "When the stock market goes down, it's big news and it's hard for people to avoid it. Even if they don't own stocks, they know someone who does or they hear all about it on the news."
The proof is in the numbers. The Dow hit its all-time closing high of 11,722 on Jan. 14, 2000. The University of Michigan's consumer confidence index reached a high of 112 that month, showing the joy people felt at seeing their portfolios bulge.
From there, the index slid along with the stock market, reaching the low 80s just after Sept. 11, 2001. The index stood at 87.6 in August.
The survey's authors said respondents in that survey spoke more often about the decline in their household wealth than at any time in the 50-year history of the study.
Once the nation's collective view of the market is set, human nature and economic forces take over until even the person who doesn't know the Dow Jones from Paula Jones feels it in the wallet.
"A lot of this is all about expectations and psychology and not much more than that," said Stephen Wu, an assistant professor of economics at Hamilton College in Clinton, N.Y.
Some workers see their pay raises and bonuses disappear as skittish companies cut back. Those cuts ripple through the economy because they mean workers have less money to spend on dining out, new appliances and pricey vacations. That means the workers and companies in those industries suffer.
Publicly traded companies often raise money to invest in their operations by selling new issues of their own shares. But when the market is as poor as it is now, that becomes a less attractive option, said James Bradfield, also a professor at Hamilton College.
Traditional pension plans and 401(k)s alike have been hit by the poor stock market. Virtually all traditional pension plans have money invested in securities. Many that were overfunded during the boom times are now underfunded, said William T. Wilson, senior economist for Ernst & Young in Chicago.
Companies will look to workers' salaries as a place to get the money to make up for the pension losses, he said.
"If you were overfunded by $50 billion and now you're underfunded by $20 billion, future profits have to go toward that and that means smaller raises," he said.
Many older workers have had to push back retirement dates because the market eroded their 401(k) savings.
But a tanking stock market also presents opportunities. Many people have taken advantage of the current slump and resulting low interest rates to borrow money for large purchases, such as cars and houses or to refinance homes they already owned.
Home sales, which have remained robust throughout the recession, totaled 6.6 million through the first seven months of this year, according to the National Association of Home Builders. That's a 300,000 increase over the first seven months of 2001.
Many people may not realize it, but their lives are affected in good ways and bad by the actions of those frantic, disheveled-looking folks shouting and running across trading floors.
"Some people will be aware of that," said Wu. "Even if you're not aware of it, you may become aware of it."
