You felt that right? Wait, you didn’t?
Then what actually happened? Just a few days ago CNN Money reported that the “Dow and S&P close[d] at 5-year highs.” Yet, the number of new jobless claims rose 8,000 to 360,750 this month from the previous four-week period. So, who exactly is benefitting from this “5-year high”? Because, seemingly, it’s not the average American. One would think that the stories behind headlines like the ones that we’ve been seeing would affect more than A-type personalities with stock portfolios—maybe even affect more than the 54% of the population with equity investments? Well, yes, they do. Sure, the numbers might seem esoteric and meaningless at first glance, but remember that stock markets serve purposes other than just providing companies with a nifty way to raise money. Not only do they matter hugely to individuals with 401(k)s, but they will matter to everyone else in the entire economy, and that includes you.
Unfortunately, there’s one infamous example of the tangible significance of stock markets: The Great Depression. Although much of the correlation between stock market indices and economic growth prompts discussions of chicken-egg causality (A study by Gerstein Fisher found that the actual correlation between annualized stock returns and economic growth is flimsy at best, and negative at worst), most can agree that Black Tuesday showed that what happens on the trading floor can make a difference in the lives of millions of people across the country. However, economic historians still argue about this, after all, only 16% of households at the time were invested in the stock market and there were certainly other major political factors to be considered. But it’s the psychological effects of the crash that are most compelling.
On Tuesday October 29, 1929, the Dow Jones Industrial Average dropped 12% to 230 points. Outwardly yawn-inducing, but intrinsically earth-shaking. What followed was a worldwide nosedive of investor confidence, meaning that lots of people lost lots of money, businesses struggled, workers were laid off, and there weren’t many places for them to turn to. Eventually 15 million in the USA alone were unemployed as a result of the Depression.
Fast-forward 79 years to the Great Recession. This time around, it’s the opposite: stock markets crashed primarily because of plummeting investor confidence following media reports of big banks going bankrupt. All of a sudden all hell breaks loose and the Dow Jones falls to it’s third worst closing index of all time. You can’t see a 500-point drop in the DJIA when you look out your window, but you can see shops going out of business, foreclosed properties and folks without jobs.
And eventually there’s the upside to all this. Again, the Dow and S&P can close at 5-year highs this week, but it’s ultimately the underlying events that matter most. Best Buy’s new and permanent price-matching program that they just announced, for example, is something you can go and benefit from. The merger between US airways and ARM will be pivotal for their employees’ careers, and Berkshire Hathaway’s acquisition of Heinz will lead to the brand popping up more aggressively in store shelves around the world. It’s simple developments like these that drive financial headlines. Stock market indices are like readings on an EKG. Although you know a 200 bpm reading for a heart rate is obviously a high number, the pressing issue is really that someone’s having a heart attack.
We always hear about bulls and bears and bubbles and bursts, so it’s easy to become desensitized to all the references of frothy-mouthed quadrupeds. But each time you glimpse a stock market headline, you’re putting two fingers to the throbbing jugular of the beast itself. So take a reading, doc, but just remember to read between the lines.