What happens to us if the stock market goes down?

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etsan's picture
etsan
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What happens to us if the stock market goes down?

Hello,

What would happen to us if the stock market say the S&P goes down to like 200? For investors that are long, it would be devastating obviously. But for people who don't do any type of investments, how would this affect them? For example during the 2008 crash when the S&P went down to what 600-700, I didn't notice anything different in my daily life. During that time, I didn't even know that there was a stock market crash and the daily activities was the same with no fear or panics at all. There was no price increases, no food shortages, life went on as usual. So how does stock market crashes, especially extreme crashes affect the ordinary folk that don't invest?

Thanks.

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SagerXX
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Re: What happens to us if the stock market goes down?
etsan wrote:

Hello,

What would happen to us if the stock market say the S&P goes down to like 200? For investors that are long, it would be devastating obviously. But for people who don't do any type of investments, how would this affect them? For example during the 2008 crash when the S&P went down to what 600-700, I didn't notice anything different in my daily life. During that time, I didn't even know that there was a stock market crash and the daily activities was the same with no fear or panics at all. There was no price increases, no food shortages, life went on as usual. So how does stock market crashes, especially extreme crashes affect the ordinary folk that don't invest?

Thanks.

Well, for starters, methinks millions of jobs would pretty much go away -- starting w/service industries and working their way out from there...

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etsan
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Re: What happens to us if the stock market goes down?

Hi Sager,

Thanks for the reply. How specifically does millions of jobs go away? I know that this happens, but how does it happen?

Regards

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SteveS
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Re: What happens to us if the stock market goes down?

When the housing bubble was underway, I remember hearing a story on NPR about NINJA (no income, no job, no assets) mortgages and I thought how crazy that was. However I had a small mortgage that I could well afford so I didn't think much about how that affected me directly. I didn't realize how these mortgages had been rewrapped and resold, with derivitives, etc etc. When it came apart it ended up killing the stock market and some of my investments. What I'm trying to say is sometimes it's hard to see how something like that might affect you, since many times it's indirect. But it probably will affect you,  so it's important to be informed from a variety of sources and try to understand your investments and how they tie into the rest of world. Lastly, as is brought up often here, have as much under your direct control as possible.

On your jobs question; say housing prices fall like they did. Many people were hoping to cash in on rising prices and could not afford their mortgages long term. They suddenly have a cash flow problem and first cut out the luxuries, so nail salons, etc go under. Now people are out of work and not buying new cars or going out to eat, so car dealers and restaurants cut back . And it cascades from there. In normal times these things happen slowly and are small scale, but when a bubble bursts, the changes happen quickly and people don't have time to adjust.

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earthwise
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Re: What happens to us if the stock market goes down?

etsan,

I can tell you one anecdote that serves as an example. In mid September of 2008 the sub-prime crisis erupted and  the stock market took a major hit. As a contractor, I had just successfully completed a negotiation with a client on a good sized job, but in the time between agreement and drawing up the documents (two days) he had lost more in equities value than my contract was worth. He cancelled. Two other potential clients dropped out of negotiations for the same reason-their wealth had evaporated. Gone to money heaven. Since that time I have gone from 5 employees down to three. All the material vendors I deal with have also reduced staff. It's a chain reaction, like dominos.

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Subprime JD
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Re: What happens to us if the stock market goes down?

Estan,

I like your question as it probably resonates with many nonfinancial addicts like us lol.

For starters, the stock market is still seen by many as a leading economic indicator. Despite the fact that its manipulated to hell and back it still serves that function. When the stock market falls it usually does so in response to economic data. Today was a classic example. The manufacturing index fell, some other indicators fell, jobless claims went up, etc. Each piece of econ data has its effect. So when large companies see the fundamentals of the economy slow, they pull back investment. With less investment there are job cuts, cancelled projects, lost wealth, etc. The last decade the market has been very bizarre. For example, in the fall of 2007 stocks were breaking out to record nominal highs, even though the fundamentals were rapidly deteriorating. In the end, the fundamentals always catch up with the stock market.

By and large, many of the investor class own stocks or know about the market. When a investor, either gas station, developer, corporation sees the stock market falling they freeze investments and sit in cash. Big corps engage in knee jerk cost cuts i.e. lay offs out of fear and projections of cutting costs.

So yes, a plunging stock market has a effect on many many people who have nothing to do with the stock market. The best example is the 1929 crash, which signaled a 30% plunge in gdp from peak to trough. But for federal reserve and gov intervention the stock market would probably be at SPX 400 right now with GDP falling by a similar, if not, greater amount.

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SagerXX
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Re: What happens to us if the stock market goes down?
etsan wrote:

Hi Sager,

Thanks for the reply. How specifically does millions of jobs go away? I know that this happens, but how does it happen?

What SteveS & Earthwise said.

Our personal services biz juuust squeaked through the last downleg (our gross receipts went from an all time high all the way down to just below survival level [we got by on our reserves]).  We've only just in the last few months been able to get out of survival mode and begin slooowly rebuilding our reserves (biz went down 40% between Oct '08 and June '09 -- they have rebounded halfway back to our all-time high since Jan '10).  

Another major gut-punch to the markets could shove us back down into survival mode and from there it just takes a few more straws to break the business' back.  Which would put myself, my wife and two other people out of work (not to mention all our vendors would lose our business -- multiply that effect by 100 other small businesses and now you have our vendors closing up shop or trimming jobs too.

Domino effect.  Lather, rinse, repeat.

Viva -- Sager

nb:  edited for spellink errorz

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strabes
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Re: What happens to us if the stock market goes down?

etsan, the stock market is not fundamental at all at this point, meaning it is simply a gambling game being fueled by liquidity in the gambling houses.  that liquidity comes from debt/loans.  so when you see a market crash at this point where we're still near the top of a mega debt bubble, it is simply a sign of institutions pulling out to be able to cover obligations, i.e. liquidity is disappearing, i.e. money is being destroyed in the debt markets hovering above the stock market.  when money is destroyed, everything is effected.

 

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docmims
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Re: What happens to us if the stock market goes down?

Also when the market is crashing, gold and other commodities will crash with it, because investors will be forced to sell all types of their assetts to raise cash to cover their margins.  Retirees will have less money to spend as returns on their investments will fall.  People will curtail any descretionary spending and economic activity will decrease. 

 Profits probably won't decrease, because they are based on fictional, mark to fantasy accounting which became legal after the last crash(however the Enron people are still in jail even though the law has changed making what they did legal -- interesting).

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FinPro
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Re: What happens to us if the stock market goes down?

Rather than repeat that we are on shakey ground, I would suggest that the idea that our economic system has always been fragile is something that had escaped an awful lot of people, until recently.  That adds to the perception of risk, no matter the fundamentals.  The financial assets which drive discretionary spending, as described above, have been reflated on enormous liquidity.  Lots of cash lying around, and cheap.  It's created this false sence of value at the levels stocks are currently trading, but it was necessary to get the economy back in the direction of its potential growth rate.  In short, It's medling and there's always been medling.  Faced with a choice of employing monetary and fiscal tools to get higher stock values which we know are somewhat artificial, or pulling the plug and feeling more secure about natural market forces taking stock values to a place whose consequences on employment become self perpetuating, government has commonly chosen the former.  When a downturn is severe, we're like a patient whose had the uneasy feeling of having had a heart transplant.  The markets recent bouts show the symptoms of rejection, but unless we accept the discomfort we will revisit the latter scenario.

So, yes, stock (and home) values drive jobs.  They can also crush pension values and cause all kinds of other economically destabilising cash needs...that cost jobs by taking money away from payroll.

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