So the Dow dropped — what’s it to me? For most, nothing.
In September 1929, my parents started high school at Oakland Tech. A month later, the stock market crashed. Both were being raised by single moms, one a maid at the Durant Hotel, the other a private caterer for Piedmont families. Sixty years later, my mom recalled her reaction to the stock market crash: “It had no effect on our lives. It was about the rich people but not us.” A big nothingburger, as we might say today.
Of course, 1929 was very different than today. There were no social media, no 24/7 cable television, indeed, no voices other than those on the radio or in print telling us whether the sky is falling and whether we should be alarmed. In 1929, relatively few Americans owned stock, perhaps as little as 3 percent but surely no more than 10 percent of the population.
Today, about half of us own stock, according to estimates from the Federal Reserve’s Survey of Consumer Finances. But that number is deceiving. Only about a third of us have more than $5,000 in the stock market. And stock ownership is very concentrated at the top of the wealth distribution. Families whose income is $75,000 or less annually — over twothirds of families — collectively own less than 10 percent of stocks. The 10 percent wealthiest American families own 84 percent of stocks. For those of us who do own stock, it is typically through our retirement accounts — that 401(k) or IRA statement that shows up in your mailbox or inbox four times a year.
Those folks who have a lot of money in the market are not reading a column in The Chronicle for financial advice. They have financial advisers and should listen to them. Those of us whose 401(k) or 403(b) will fund retirement in a decade or more should remember the lesson of 2009: What goes down eventually comes back up. But for those of us who have nothing or little in the stock market, what should we make of the recent big swings in stock value? In the same sense that knowing at least a little history is helpful in putting current political events into perspective, knowing at least a little economics is helpful in putting current market gyrations into perspective. My suggestion: Not to worry, but do stay “woke.”
The stock market — often captured by one number such as “the Dow,” which is an average of the stock prices of just 30 companies — is not the same as the “real economy,” by which we mean our jobs and wages and ability to pay for the things we want to buy. That’s why you shouldn’t worry.
But there can be connections, which is why you should stay “woke.”
Stock prices reflect not only current conditions, but also future expected profits. If I think ABC Corp. will earn big profits this year, I might want to own part of ABC Corp. so I can share in those profits. To do so, I would buy shares of its stock. And if I (and many others) buy shares of ABC’s stock, the price of that stock will rise. When that happens for several different companies, it will be reflected by a rise in “the stock market” — as measured by the Dow Jones industrial average, the Standard & Poor’s 500 index, the Nasdaq composite, or some other index quoted on the news.
Similarly, if I own ABC Corp. stock and I think its profits will go down this year, I might want to sell my stock. If a lot of others agree with me, the price of that stock will fall.
So what affects profits? Profits go up when corporate taxes go down, as they will thanks to the new federal tax law. And profits go up when deregulation allows for reduced corporate expenses, and the Trump administration has been deregulating industry at a rapid pace in accordance with Executive Order 13771, which President Trump signed on Jan. 30, 2017.
What about the recent attention-getting drops in the stock market? The big concern is how rapidly interest rates will rise this year. And that’s where the connection to everyone’s life comes in.
The Feb. 2 news of a 2.9 percent increase in wages over the year created concern that businesses might increase their prices to cover higher wages, and that would mean a higher inflation rate. (The concern was probably unfounded, because businesses do not need to raise prices to cover wage increases; the corporate tax cut will more than cover such a small increase in wages.)
The Federal Reserve has one big job: prevent rising inflation. So the fear of higher prices to cover higher wages led to a fear that the Federal Reserve will raise interest rates rapidly in 2018. Combined with news that the U.S. Treasury is burning through cash due to the tax cut and will need to increase its borrowing — another source of rising interest rates — fear of higher borrowing costs leads to fear of fewer opportunities for business expansion and lower future profits. And all of that ends with the decision that leads to a big stock market decline: Sell!
For most of us, the takeaway is probably to keep an eye out for rising interest rates. But the stock market gyrations themselves? Change the channel. I hear Netflix has recently dropped a new season of “Grace and Frankie.”
Martha L. Olney is teaching professor of economics at UC Berkeley and the author of “Macroeconomics as a Second Language” (Wiley, 2011), a good place to start if you want to learn a little economics. To comment, submit your letter to the editor at SFChronicle.com/letters.