After going up for years, the stock market comes back down to earth.
Even when the country was in a lot of trouble, investors made double-digit returns on the market. But the party is over, and it might not happen again for a long time.
Until not too long ago, the stock market seemed to defy gravity by giving people double-digit returns that kept them financially stable even as everything else fell apart.
When the pandemic started to change the way people lived, the stock market dropped for a few weeks. Then, it had one of the biggest rallies in history. Stock prices went up both the day that rioters broke into the U.S. Capitol and the week that George Floyd was killed and protests broke out in many American cities. During this time of great change, the market seemed to send a counter-signal that things would be OK, at least from an economic point of view.
But problems in the real world have finally stopped the party on the stock market. Because food prices are going up and there is a war in Ukraine, inflation is going through the roof. This has caused the Federal Reserve to raise interest rates significantly for the first time in a long time, which has sent stock prices tumbling.
Stocks went up 2.4% on Friday, but that wasn’t enough to make up for the losses they had all week. The stock market had lost money for the sixth week in a row, which hadn’t happened since 2011. The S&P 500 has dropped more than 16 percent since its peak in January. It has been close to a bear market, which is a drop of 20 percent. As long as inflation stays high and a recession seems likely, it may fall even more.
Even after the bleeding stops, investors in the stock market, which is more than half of all Americans, may have to deal with years of low returns. This will leave them with much less money to pay for their children’s college educations and live on in retirement.
This comes out just a few months before the midterm elections, making things worse for Democrats who are already having trouble convincing voters that their party and President Joseph R. Biden are steering the economy in the right direction.
Former President Donald J. Trump often claimed that he was responsible for the skyrocketing rise of the stock market. Now, Mr. Biden and his party will almost certainly get some of the blame for its recent fall.
In reality, the stock market is not the best way to figure out how the real economy is doing. Even though unemployment is low and consumer spending is still going strong, a country’s financial psyche can be hurt by more than a month of painful losses.
Mark Zandi, chief economist at Moody’s Analytics, said, “People look at the stock market as a barometer of the economy and how they are doing financially.” “When they see green on the screen, they feel good. When they see red, they feel bad.”
Years of low interest rates have helped send stock prices through the roof, in part because other investments, like bonds, that are tied to interest rates don’t give back much. Investors found that the stock market was one of the few places where they could make a lot of money.
During the pandemic, rates went even lower as a way to help businesses and consumers get through the shutdowns, and it worked. Investors bought a lot of stock in companies, which kept them flush with cash and let them keep hiring people, paying rent, ramping up production, and, of course, giving shareholders dividends and buying back their own stock.
But inflation, which makes it hard for families to get by, also helped kill the mood on the market. The Fed raised interest rates to try to slow down the economy and stop food and gas prices from going up steadily.
Wall Street has been waiting a long time for this moment to come. But the reaction of the market, which some call a “reset” and others a “comeuppance” for stock investors, is still painful.
Emily Bowersock Hill, founder of Bowersock Capital Partners and chairwoman of the investment committee of the Kansas Public Employees Retirement System, a pension fund with more than $20 billion, said, “I don’t think people realized how fragile the stock market was.”
Ms. Hill said that some of the declines were probably good for the market because they got rid of the froth that made “meme stocks” possible. “Meme stocks” are companies with questionable business prospects like AMC Theatres, BlackBerry, and Bed Bath & Beyond, whose share prices were driven up by speculators.
But the downturn has also hurt the share prices of companies that represent innovation and the future. Amazon is down more than 30 percent since the beginning of the year, and Alphabet, which owns Google, is down about 20 percent as investors rethink how much those companies are really worth.
Almost all stocks have gone down in value. Ms. Hill said that the market drop has been going on and on, which is sad.
Maybe no one knew better than Mr. Trump what the market meant to him on an emotional level.
In November 2017, Mr. Trump said, “The reason our stock market is doing so well is because of me.” This was one of many times he bragged about rising stock prices or pushed the Fed to lower interest rates even more to boost the economy.
Early on in the pandemic, in April 2020, when stores, offices, and churches were closed, children were stuck at home trying to go to school online, and morgues were full of dead people, Mr. Trump tweeted that the U.S. had “the biggest Stock Market increase since 1974.”
Even though most Americans have some money in the stock market, it is still a game for rich people. Edward Wolff, an economics professor at New York University, did a study that showed that the top 5% of Americans by wealth own 72% of all stocks.
But the stock market’s meaning is important. Richard Sylla, a retired economics professor at New York University’s Stern School of Business, said, “It’s the one story that’s on the news every night.”
Do prices go up or down? Win or lose today, this week, this year, and during this presidency?
On Friday, the consumer sentiment index from the University of Michigan fell more than expected. Some economists say that this drop was partly caused by stock market losses. Ian Shepherdson, the chief U.S. economist at Pantheon Macroeconomics, said that the index is now 13 points below where it was when Covid first hit. In a research note, Mr. Shepherdson said that this kind of deep pessimism shows that people have short memories.
It also shows that the Biden administration is in trouble. Under President Biden’s watch, the stock market party is coming to an end, and it might be a while before another one starts.
Mr. Sylla, who co-wrote a book about the history of interest rates and studied stock market returns over 200 years, was right in September 2011 when he said that the next 10 years would have high returns.
But he said that returns will be less “loud” in this decade. Even when the market stops falling, it probably won’t bounce back in a big way like it did after the first few months of the pandemic.
Many analysts expect low-single-digit annual returns, around 5%, for the next few years. This is a huge letdown compared to the S&P’s average annual return of about 17% in the 10 years before the start of this year.
Mr. Sylla said, “If there’s one good thing about the stock market getting what it deserves, it’s that people who haven’t done so well in this economy might enjoy a little schadenfreude.” “After years of the rich getting richer and the poor getting poorer, stocks are no longer going to help anyone get much richer.”
Ms. Hill said that investors who have joined the market in the last five years have mostly seen big gains.
Even when the market dropped a few percentage points, investors got used to “buying the dip,” which means they invested aggressively on a day when the market was down a lot and their bet that the share price would go back up was right. But that plan might not work as well in the years to come.
Ms. Hill doesn’t see any easy things that President Biden could do to control inflation, which is scaring investors and making the market feel bad.
A Democrat wouldn’t want to try to stop wage growth, which is a cause of inflation. Also, the war in Ukraine, which is driving up the price of oil, natural gas, and commodities like wheat, seems like it could last for a while.
Even though people who work with pensions and other investments have been preparing for a period with much lower returns, Mr. Zandi said it would probably come as a surprise to casual investors who have grown used to seeing their retirement savings grow at a rate they have come to expect.
“I don’t think the average American family has thought about it this way,” he said. “Most people might think that future returns will be the same as recent returns. They won’t expect it.”
Mr. Zandi thinks that this change will also make the stock market less important as a symbol.
“For the last 30 years, everything has happened on the stock market,” he said. “As it gets less exciting and the returns get less exciting, it won’t be as important to our finances. It won’t be as cool anymore.” It will be replaced by something else. I don’t know what that will be, though.”