This website collects cookies to deliver better user experience. Cookie Policy
Accept
Sign In
The Wall Street Publication
  • Home
  • Trending
  • U.S
  • World
  • Politics
  • Business
    • Business
    • Economy
    • Real Estate
    • Markets
    • Personal Finance
  • Tech
  • Lifestyle
    • Lifestyle
    • Style
    • Arts
  • Health
  • Sports
  • Entertainment
Reading: Stock Market Jitters Don’t Endanger Economy Yet
Share
The Wall Street PublicationThe Wall Street Publication
Font ResizerAa
Search
  • Home
  • Trending
  • U.S
  • World
  • Politics
  • Business
    • Business
    • Economy
    • Real Estate
    • Markets
    • Personal Finance
  • Tech
  • Lifestyle
    • Lifestyle
    • Style
    • Arts
  • Health
  • Sports
  • Entertainment
Have an existing account? Sign In
Follow US
© 2024 The Wall Street Publication. All Rights Reserved.
The Wall Street Publication > Blog > Business > Stock Market Jitters Don’t Endanger Economy Yet
Business

Stock Market Jitters Don’t Endanger Economy Yet

Editorial Board Published January 30, 2022
Share
Stock Market Jitters Don’t Endanger Economy Yet
SHARE

The past few weeks of stock market turmoil don’t mean the economy is about to be derailed, but rather that the recovery is maturing and no longer needs low interest rates, economists and Federal Reserve officials say.

While the economy’s rebound from the pandemic-induced recession in spring 2020 has been strong, the stock market’s has been spectacular. Between its trough in March 2020 and its all-time high Jan. 3, the S&P 500-stock index soared 114%. Now, despite the economy growing more in 2021 than at any time since 1984, the S&P 500 index is down about 8% from that peak.

On Wednesday, Federal Reserve Chairman Jerome Powell said the market drop wouldn’t harm the recovery. He said it is a natural response to the Fed’s planned phaseout of the emergency stimulus programs implemented at the start of the pandemic that helped prop up asset prices.

“We feel like the communications we have with market participants and with the general public are working and that financial conditions are reflecting in advance the decisions that we make,” Mr. Powell said.

Asset prices are linked to the economy in several ways. In part, they reflect investors’ expectations of future growth. Recessions are usually preceded by significant stock market declines. While economists surveyed by The Wall Street Journal this month put the probability of recession in the next 12 months at just 18%, they do see growth slowing sharply this quarter. (To be sure, economists have a poor record in predicting recessions.) The spread between short and long-term bond yields, called the yield curve, has also shrunk, which usually signals slowing growth.

Asset prices also directly affect the economy through the “wealth effect.”

A rising stock market pads retirement portfolios and other forms of wealth which can make consumers more willing to spend. Likewise, when the stock market is down, people feel poorer and may splurge less.

A study last year by economists at Harvard University, the Norwegian Business School and the Massachusetts Institute of Technology quantified the wealth effect, estimating that households spend 3.2 cents of every additional dollar they get from rising stock prices.

In the third quarter of last year, the value of financial assets held by American households was almost 32% higher, or $27.5 trillion, than in the first quarter of 2020, when the pandemic first took hold in the U.S., according to Federal Reserve data.

At the same time, consumer spending, unadjusted for inflation, rose 13.2% between the first quarter of 2020 and the fourth quarter of 2021, according to the Commerce Department.

Bank of America economists estimate that the wealth effect added between 1.3% and 2.5% to consumer spending growth in the second quarter of 2021 and between 1.2% and 2.4% in the third, more than at any point since at least 1954.

Fed officials take advantage of the wealth effect when trying to move the economy out of recession, according to a study by Ricardo Caballero and Alp Simsek, both of MIT. By lowering interest rates or buying bonds, which raise asset prices early in the recovery, the Fed prompts stockholders to spend more, boosting demand.

When Fed officials determine the economy no longer needs such support, they signal they will unwind their asset purchases and raise interest rates. Stock markets fall as a result.

That, Mr. Caballero said, describes the current situation. The Fed has signaled it will stop buying bonds and begin raising interest rates in March to tamp down inflation, which at 5.8% in December, using the Fed’s preferred price index, is far above its 2% target. It’s not a harbinger of recession, but a sign that the recovery is moving to a new phase, ideally one characterized by longer-term measured growth, he said.

“We are at a point in which [aggregate demand] is at the level current supply needs,” he said. “The speed of the recovery going forward will depend largely on how fast aggregate supply recovers.”

Joel Naroff, president of Naroff Economics, said wealth is still well above where it was before the pandemic, which should buffer consumers from the volatility of the past few weeks.

In the short term, however, Matthew Luzzetti, chief U.S. economist at Deutsche Bank Securities, said lower asset prices could, along with the end of federal child tax credit payments and the continued grip of Covid-19, erode consumer confidence. “The wealth effects create more uncertainty about the outlook and are hard to quantify,” he said.

SHARE YOUR THOUGHTS

What is your biggest concern over market volatility? Join the conversation below.

Lower stock prices may have a positive side: By cooling demand, they may also take some pressure off inflation. Mr. Luzzetti said lower asset prices could also make retirement less attractive for some older workers, which could ease a labor shortage when the unemployment rate is at a historically low 3.9%. A study by the St. Louis Fed concluded higher financial and real-estate asset values account for roughly 15% of the total decline in labor-force participation among those aged 51 to 65 between January 2020 and September 2021.

For now, the Fed doesn’t seem concerned about the market. Speaking to reporters Wednesday, Mr. Powell focused on the risk of persistently high inflation, which would require faster rises in interest rates.

That could lead to further stock market declines, said Dana Peterson, chief economist at the Conference Board. “It’s really going to be this tug of war over the year in terms of how much markets react to Fed actions and how much the Fed ignores it,” she said.

Write to David Harrison at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

TAGGED:Business NewsPAIDWall Street Publication
Share This Article
Twitter Email Copy Link Print
Previous Article For Chip Industry, Supply Woes Push Next Target to  Trillion For Chip Industry, Supply Woes Push Next Target to $1 Trillion
Next Article Major Investors Hold Ground on Russian Debt Amid Ukraine Crisis Major Investors Hold Ground on Russian Debt Amid Ukraine Crisis

Editor's Pick

Fremont police ask for assist discovering ‘at risk’ lacking lady

Fremont police ask for assist discovering ‘at risk’ lacking lady

FREMONT — Police listed here are asking for the general public’s assist finding a woman who disappeared on Friday afternoon…

By Editorial Board 1 Min Read
Why “No Pain, No Gain” Is Hurting Your Health—and What to Do As an alternative
Why “No Pain, No Gain” Is Hurting Your Health—and What to Do As an alternative

At 43, I’ve grow to be much more taken with how motion…

16 Min Read
How Hulk Hogan strong-armed his wrestling persona right into a money-making machine
How Hulk Hogan strong-armed his wrestling persona right into a money-making machine

FOX Enterprise’ Jackie DeAngelis experiences that WWE legend Hulk Hogan has died…

5 Min Read

Oponion

Prince George Turns Twelve: Is He ‘Twinning’ With William?

Prince George Turns Twelve: Is He ‘Twinning’ With William?

Studying Time: 3 minutes Prince George is a birthday boy!…

July 22, 2025

Horace: The Males’s Grooming Model That’s Reimagining Self-Care For All | Fashion

I’ll be the primary to confess…

October 7, 2024

Find out how to Recreate the Clear-Man Uniform That’s All Over Instagram | Fashion

We independently consider all really helpful…

July 7, 2025

Replace: Winter climate advisory in place for Yosemite till Monday evening – as much as 12 inches of snow

Yosemite is included in an up…

March 17, 2025

Is Inflation a Microeconomic Problem? That’s What Biden’s Competition Push Is Betting

There’s a saying on Wall Street…

January 12, 2022

You Might Also Like

Thales Reinforces its Management in eSIM and IoT Connectivity with a ‘Ready to Use’ Licensed Resolution
Business

Thales Reinforces its Management in eSIM and IoT Connectivity with a ‘Ready to Use’ Licensed Resolution

At a time when billions of linked objects are reshaping industries, Thales has achieved a vital safety certification for its…

4 Min Read
Soracom IoT Platform Achieves SOC 2 Kind 2 Compliance for Safety, Availability, and Confidentiality
Business

Soracom IoT Platform Achieves SOC 2 Kind 2 Compliance for Safety, Availability, and Confidentiality

Soracom, Inc., right now introduced that it has efficiently achieved System and Group Controls (SOC) 2 Kind 2 compliance, reinforcing…

2 Min Read
Mobile IoT Module Shipments Grew 23% in Q1 2025 as US–China tensions affect vendor panorama
Business

Mobile IoT Module Shipments Grew 23% in Q1 2025 as US–China tensions affect vendor panorama

In brief Shipments of mobile IoT modules and chipsets grew 23% year-over-year in Q1 2025, based on IoT Analytics’ International…

20 Min Read
Prime 7 Visitor Posting Marketplaces to Purchase Visitor Posts That Drive Search engine optimization Outcomes
Business

Prime 7 Visitor Posting Marketplaces to Purchase Visitor Posts That Drive Search engine optimization Outcomes

Utilizing a visitor posting market helps you overlook all that like a nasty nightmare. However how do you discover probably…

14 Min Read
The Wall Street Publication

About Us

The Wall Street Publication, a distinguished part of the Enspirers News Group, stands as a beacon of excellence in journalism. Committed to delivering unfiltered global news, we pride ourselves on our trusted coverage of Politics, Business, Technology, and more.

Company

  • About Us
  • Newsroom Policies & Standards
  • Diversity & Inclusion
  • Careers
  • Media & Community Relations
  • WP Creative Group
  • Accessibility Statement

Contact

  • Contact Us
  • Contact Customer Care
  • Advertise
  • Licensing & Syndication
  • Request a Correction
  • Contact the Newsroom
  • Send a News Tip
  • Report a Vulnerability

Term of Use

  • Digital Products Terms of Sale
  • Terms of Service
  • Privacy Policy
  • Cookie Settings
  • Submissions & Discussion Policy
  • RSS Terms of Service
  • Ad Choices

© 2024 The Wall Street Publication. All Rights Reserved.

Welcome Back!

Sign in to your account

Lost your password?