In the 20 past years, most economists had the perception that the stock market never had any solid impact on the American economy. In fact, only a few Americans owned stock not to forget that their prices reflected their expectations on future earnings. More so, these expectations were either inaccurate or revolving around short-term emotions. However, the current situation of the stock market proves otherwise for it reflects the American economy than before.
Let’s dig deeper on the various ways that the current stock market reflects the American economy.
Currently, more Americans have invested in the stock market when compared to the past. For instance, recent research indicates that in the past 30 years, only 30% of the Americans owned any form of stock. However, to date, more than 50% of the Americans own stock. More so, in 1989 only 22% of the Americans fewer than 35 years owned any form of stock, while as 41% of them did in 2016. As such, it is admissible that the current stock market state of ownership among Americans is greater than in the past years.
The pre-mentioned increase in Americans investment in stock market arose from various aspects. Mainly, it arose from the increase in the popularity of 401(k) type retirement plans in the 1990s. The increase in popularity of the plans made it easy for most Americans to easily access the stock market.
Not only that, there was also an increase in the popularity of mutual funds and index. The increase in popularity of the two –mutual funds and index, resulted in the spread of stock market risk across many securities. As a result, the stock markets become a safer and easier investment option for Americans. Consequently, most Americans today have invested in the stock market.
The increase in the Americans ownership of stock and investment in the stock market has a solid impact on the Americans economy. For instance, a slight change in the American stock market will, in turn, have a concrete influence on their economy. A good example is with the local economies which are very sensitive to the performance of the stock market.
Supportively, in one of their recent paper, the National Bureau of Economic Research argues that whenever the stock goes up, the shareholders will more often feel wealthier making them spend more than before. Confirming this, economists explain that the creation of a dollar of the stock market will result in Americans spending 2.8 cents more annually.
Notably, the effect of the creation of a dollar of the stock market may be unseen within a short time but will be easily seen in the long run. For instance, in the long run, there is higher wages and more employment which are components of the economy. More so, the creation will result in a specific monetary policy whereby there will be lower interest rates. These lower interest rates will target increasing the stock prices in the short run, and boosting the economy in the long run.
Parting Shot
Indeed, the stock market performance has a close but hidden relationship with the economy. In fact, it is amazing that the stock market will reflect the state of an economy. Therefore, with more Americans investing and owning stock, you can evaluate and predict the future trends and performance of the American economy easier.
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