Judging by some memes in circulation, a large segment of the American population is callously indifferent to the health of the stock market. “Wall Street isn’t Main Street. Stocks aren’t the economy, so who cares if stocks are down?”
Ignoring the fact that Main Street is in an even worse condition than Wall Street right now, given the Coronavirus’s impact on unemployment numbers and small private businesses, the health of the stock market affects everyday Americans more than ever before.
For comparison, before the 1929 crash, investing in the stock market (or “speculating” as it was commonly called), was typically confined to financiers and the wealthy, and formed a very small portion of the average person’s net worth. Today, things are much different. According to Quartz, in September 2019, “More Americans than ever are invested in the stock market. Just 30 years ago only about 30% of Americans owned any form of stock—now more than 50% do…
“The rising popularity of index and mutual funds makes stock market investing easier and safer, since the risk is spread across many securities. But the bigger reason is the increased popularity of 401(k)-type retirement plans in the 1990s gave many Americans easy access to the stock market….
“The trend even holds for student-debt-burdened millennials. In 1989, only 22% of Americans under 35 owned stock, while in 2016 41% did.”
In addition, there are now large institutional investors that need regular returns to keep pace with inflation and rising costs, since bond yields and cash provide no return. These institutional investors include government, in the form of public pension funds, and companies which buy back their own stock and invest their cash in the broad market to grow their assets.
Why are we in this situation? Mainly because the United States does not have the same safety net as other developed countries. Social security is usually a small portion of one’s retirement earnings that provides you just enough money to survive if you have nothing else. The vast majority of Americans rely on the stock market to retire comfortably.
If this sounds like a house of cards, it is, and we should be very worried when the market crashes. But before we criticize this system and hope for its downfall, it’s important to remember that this system exists because it is incredibly efficient at pumping money back into the economy and keeping it roaring along.
Compared to Europe and Japan, the rate of economic growth and stock market returns in the United States have been a beacon of light in a sea of darkness for decades. Whether the average person in those countries is better off is up for debate, but until we see massive social changes to improve life and a secure retirement in the United States, stock market crashes will continue to be very bad for the majority of the population. This should shed some light on the extreme measures taken by the Federal Reserve in recent weeks.