Economics
Why we do want stocks to go up?
Feb 24th 2011, 14:42 by R.A. | WASHINGTON
IF YOU'RE planning on buying a lot of something in the near future, it's bad when the price of that something rises. No question about that. Millions of Americans are now in the workforce, taking a slice of each month's paycheque and using it to purchase equities, and many of them (like me) will continue to do this for the next few decades. If prices shoot up now and then plateau, that's bad. We all earn less on our investment. Ideally, stocks would fall to rock bottom levels then skyrocket the day we hand in our retirement notice. Right? So argues Felix Salmon:
[M]ost of the people cheering for the stock market to go up are in the accumulation phase of their careers, not the spending phase. They're still putting money into retirement funds, and they aren't intending on spending it for decades. So why are they so happy when stocks go up, and sad when stocks go down? Shouldn't it be the other way around?...
The main reason...is simply psychological. If asset prices go up, that means people with assets are richer, and have made money in the markets. If you're rich and you've made money, that makes you happy. Even if over the long term you'd be better off if you were able to continue buying bargains.
I don't think this is really that complicated. Equity prices reflect a lot of things but they're a pretty good gauge of expectations of future corporate profitability. And corporate profitability is closely related to growth. In early 2009, the S&P 500 hit its lowest level in over a decade. People were unhappy with that, and not primarily because they felt less rich or because they foolishly didn't realise that they had the bargain opportunity of a lifetime. They were unhappy because it signalled that expectations for growth had plummeted; economic conditions, broadly speaking, were awful. Similarly, when markets rose thereafter, people were happy not just because they felt richer or because they foolishly didn't realise that they'd missed the bargain of a lifetime, but because rising share prices were a highly visible indicator of rising growth expectations.
In a bad economy, shares are a bargain, but many more households are financially stressed. During the downturn, millions of unemployed workers obviously weren't plowing money into their 401(k)s. Other households cut back their contributions to make ends meet, and some had to take money out of savings funds to pay the bills. Given the choice between being flush enough to save in expensive savings vehicles and being too broke to save in cheap savings vehicles, most folks are going to opt for the former. So I don't think it's at all strange that people like a rising market, whether or not they're in the saving portion of their life.
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Its sort of like the guy who bought his house 15 years ago, its up over 100% over purchase price, but off its peak so he sulks about it.
Yes, high stock prices are always great, so let's have the Fed constantly backstop investors. In fact, instead of printing money to buy treasuries, the Fed should print trillions of dollars and buy stocks directly. That way, everyone will always be happy and we will live in Utopia with unicorns and be married to supermodels.
The Dirty Fed wants stocks to go up so people will feel wealthier and take on more unsustainable debt to buy unnecessary junk.
When share prices go down companies abilities to borrow also goes down. With this goes employment, 401k matching, etc.. So when stocks go down most are unable to participate in the benefit. As stocks go up. More people are able to benefit.
In the 2008 down turn I cashed out in 2007 and got back in to early. That's the general problem. When you want to be sticking in the most money it is simultaneously the most difficult to do.
People think, as you imply, in Keynesian demand terms in their private lives. Even those who insist Keynes is nonsense.
Therein lies the argument against rational actors in the marketplace.
Human beings have hella more going on in their skulls than maximization of long term benefit.
Any asset price that rises beyond it's fundamental value is inflation, nothing more. It ought to be so viewed by the Fed.
I got lucky, but I was pretty happy with stocks hitting the bottom in early 2009. I plowed a bunch of money into equities from just-maturing CDs and earned something like a 40% return since then. I'm not going to be seeing this money for a few decades, too, so I'm not really worried if some of that value is erased short-term.
In this blog, our correspondents consider the fluctuations in the world economy and the policies intended to produce more booms than busts.
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