By the close of the stock market on Wednesday, the S&P 500 was down about seven per cent from the record high it had hit in September; after several days of volatility, there had been a big sell-off. On Thursday, the index rose slightly after James Bullard, the president of the Federal Reserve Bank of St. Louis, said that the Fed should consider delaying the end of the bond-buying program known as quantitative easing. On Friday, they rallied even more, thanks to better-than-expected economic data and company earnings reports. Still, the improvement wasn’t enough to quell some people’s worries: Is the sell-off of the past several days bad news for the economy at large?
Whenever stocks fall sharply in a short span of time, people tend to panic. The stock market reflects how the economy is doing and where it is going, and its performance has ramifications not only for investors but for workers, borrowers, and others who may or may not trade on the exchanges. Lately, one troubling development has seemed to follow another.
Last week, the International Monetary Fund lowered its outlook for global economic growth next year, from four per cent to 3.8 per cent. The fund said that this was largely because developing countries, specifically Brazil, China, India, and Russia, are expected to grow more slowly than had been projected earlier. The fund also lowered its growth expectations for the euro zone’s three biggest economies—Germany, France, and Italy—and said that the euro zone, as a whole, is much likelier to fall into another recession in the next six months than it had previously thought.
Since then, many of the economic headlines have seemed to reinforce the I.M.F.’s worries. In the euro zone, industrial production has fallen, including in Germany, which has cut its growth forecasts for the year. Standard & Poor’s, the influential ratings service, lowered its outlook on France’s credit rating from “stable” to “negative,” and said that it “indicates our view that a robust recovery of the French economy could prove elusive.” Sweden and other countries are confronting the prospect of deflation. Given these signs, calls have begun to mount for the German government to relax its strong stance in favor of budget austerity, with respect to both European Union fiscal policy and at home. (Under the headline “Build some bridges and roads, Mrs. Merkel,” The Economist suggested that the country might already be in recession.)
World events, too, are playing a part. Germany offered “geopolitical crises” as one reason for its economic uncertainty. Globally, oil prices are falling, partly because North America, Libya, Iraq, and others are producing more oil, and partly because forecasters expect lower demand for it amid slower-than-anticipated economic growth. Investors are worried about the economic impact of the Ebola crisis; the World Bank has said that if the epidemic spreads to the neighbors of the worst-hit countries—Guinea, Liberia, and Sierra Leone—it could drain up to thirty three billion dollars from the combined G.D.P. of West Africa by the end of 2015. Already, the stocks of airline companies have been hit by news of Ebola sufferers travelling by air.
Against this backdrop, investors were looking for signs of hope from major U.S. companies, many of which started reporting third-quarter earnings this week, and from economic data. On Thursday, Google reported earnings that missed analysts’ expectations, and so its shares slipped a little the next day. But, also on Friday, General Electric and Morgan Stanley both beat expectations and saw their shares rise. Another piece of upbeat news on Friday: reports on consumer sentiment and home construction came in better than expected.
In the short term, it’s easy to forget that the market’s gyrations have little immediate impact on regular people. According to the Federal Reserve Board’s Survey of Consumer Finances, last year only forty-nine per cent of U.S. families owned stocks—whether directly or indirectly, through investments like mutual funds—down from a peak of fifty-three per cent in 2007. The biggest decrease in stock ownership took place among those in the lowest income group.
Partly because so many lower-income people weren’t able to reap the benefits from the stock market’s rise over the past couple of years, their wealth has dwindled. Families whose income level places them in the bottom fifth of U.S. earners saw their average net worth fall twenty-one per cent from 2010 to 2013, according to the Fed survey. (In that period, the net worth of those in the top ten per cent increased two per cent.) While people with the means to invest are suddenly concerned about what happens to stocks, those who didn’t hold stocks in the first place might have told us, before the bad news started pouring in, that the recovery from the recession has been precarious and uneven, and that more trouble might be in store.
