Should the Federal Reserve worry about tanking stock markets? One reason for calm is that they do not much affect household finances. Just over half of Americans say they are invested in the stock market, but their direct stock holdings are small, making up only 14% of household balance sheets (see chart). That means the effect of this week's stock market falls on household spending, and on the American economy, is probably limited.
Stocks tend to be held by high earners, who are less likely to cut spending in response to falls in their wealth. Mom-and-pop investors are also unlikely to fund their investments with borrowing. That is in contrast to household investments in houses, which are levered by mortgages, magnifying losses when prices fall. In 2009 collapsing house prices, rather than tanking markets, did for household finances.
Nosediving markets and panicking traders are, of course, a worry: market turmoil might make it harder for companies to raise money and invest, or might itself be a result of worsening growth forecasts. Gloomy headlines can be enough to cause anxious consumers to tighten...Continue reading
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