The volatility of the US market has temporarily dazed the investors and consumers. The question on everyone’s mind is when to make the next move. In essence, no one prefers to lose money. Yet panicking isn’t the best way forward either.
The stock market movements profoundly affects the American finance market and individual consumers. When share prices collapse, it can create widespread havoc due to economic disruption.
The disastrous stock market crash in 1929 precipitated the now-famous The Great Depression during the 1930s. Due to this reason, plummeting share prices tends to make headlines now. Oftentimes, it does affect the US financial market in select areas.
1. Confidence in Money Markets
The trend of share price movements oftentimes indicate the expectations of the people and investors. Falling share prices suddenly induces panic-mode among the consumers and investors alike. The former cuts down on spending while the latter tend to opt for a safer portfolio. Share prices can also rise when investors can foresee a recovery within the next 2 to 3 years.
2. The Market for Bonds
A decrease in the stock market indirectly makes other types of investment more appealing. People opt for other financial options, gold and government bonds are often the next best choice. These investments offer better return on investment in uncertain times. Interestingly enough, the trend to purchase these investment commodities always been high during economically uncertain times.
The market volatility also affects the companies that are listed on the stock markets. As is the case, shareholders expect larger dividends from their investments. Due to this reason, in a bid to fulfil these aspirations, companies will resultantly increase the short-term profits to meet the desired numbers.
4. Decreased Pensions
Retirees with private pension and those associated with investment trust(s) are undoubtedly affected by the shifty stock market movements. Pension funds are active investors in stock market. Ergo, a prolonged fall in share prices ultimately decrease the final pay out of the pension amounts.
In an undesirable scenario, when share prices fall too much, the pension funds will be unable to fulfil their ‘larger than life’ promises. This will inadvertently affect many households in turn.
5. Effect on Wealth
The consumer spending halts as well. The spending on clothing and food drastically decreases in uncertain times. The numbers are even higher when unemployment rises. This is why consumer spending is also affected when market is volatile.
In an uncertain market, the housing market also takes a backseat and awaits the market to stabilize overall. Sellers halt selling and wait for a more opportune moment.
6. Enforcement of Tariffs
With the imposed tariffs on imported items, the consumer spending will shift towards American-based products and other countries on which tariffs are not yet imposed. This incidentally means that America is purchasing more and exporting quite less when compared to its exports. This usually results in trade deficit and paves way to market volatility. Markets will be more volatile in the next few months with the rollout of tariffs.
Chrysostomos (Makis) Bollas (BSc, ACPA, AAIA, CIPFA Affil) has more than 15 years of experience in International Tax Advisory, he is a senior Partner at AMP Group. Amp Consultants, AMP Advisors UK and Founding Member of the Association of Certified Financial Consultants.