How Does the Stock Market Influence Our Economy?

The stock market has a major influence on our economy, from how well our corporations are doing to the extent of consumer purchasing. It can affect the introduction of new products and even cause companies to send their manufacturing overseas. Whether or not you invest in stocks, the stock market has a profound effect on your daily life.

Psychological Effect

When you own stock that is increasing in price, all seems right with the world. You have confidence in the stock market and you are inclined to spend more money than if the market were down. On the other hand, when your stocks trend downward, you may put off buying things until the stock improves in value. It has been estimated that consumers represent about 70 percent of the nation's buying power. If enough consumers are delaying purchases, manufacturers will scale back their businesses, and we will be headed for a recession, or worse.

Effect on Corporations

Corporations find it easier to issue new stock for growth when the stock market is on the upswing because investors are looking for additional ways to put their money to work. However, when the stock market is headed downward and companies find it more difficult to sell new stock, they will delay expanding their businesses, introducing new products and hiring additional people.

Effect on Banks

The lending policies of a bank are inextricably tied to the trends of the stock market. For example, when stocks are rising, major lenders must offer good deals on loans because corporations can raise cash easily through the sale of additional stock. However, when stocks are declining, the same corporations find it difficult to float new stock issues, and they look to the banks for loans for operations and expansion. At those times, banks impose strict rules for their borrowers.

Housing

When stocks are increasing in value, people tend to be optimistic, and that leads to a "hot" housing market. Prices and interest rates on home mortgages tend to rise during those times and lenders are eager to make loans.

Retirement

Millions of Americans have their nest eggs invested in the stock market and hope that they will have enough money to retire when they are in their mid-sixties or earlier. When the stock market is rising, they may even accelerate their retirement plans. However, when the stock market is down substantially, many of those people will delay retirement until their nest eggs have been restored. By continuing to work, they make it more difficult for younger people to step into their jobs.

References

• The Proper Home: How the Stock Market Really Affects the Economy -- and You