Corona storyline #1: #blackmonday, and #My401k

March 18

Bloomberg: Nice overview of the sectors that are more or less affected by the decline.

March 14

As the stock market plunged this past Monday, the denizens of Twitter awoke to find that all was not well with their stock portfolios. And as a researcher who studies the macroeconomic effects of the stock market, the results were interesting.

#My 401k and #blackmonday

Not surprisingly, the populi were concerned about their 401ks, which for many is the main source of retirement income, and #My 401k was trending.

From a few reactions it would seem that there may be a negative wealth effect.

Not everyone, however, was on board with this logic.

Facts don’t care about Haig-Simons income.

From a macroeconomic standpoint, while a falling stock market may be a sign that investors think a recession is coming, it can also itself be a potential cause of a recession. A major concern is that a falling stock market (a) could depress spending through a wealth effect (b) can influence spending through consumer confidence / a narrative of an economic collapse. And the numbers are not looking good. Although markets were up broadly on Friday, the Wilshire 5000, the broadest index of US stocks, was down 21% from its peak.

To get a back of the envelope estimate of this economic effect, before the crash Americans owned roughly $34 trillion in equities. A 21% decline is a hit to financial wealth of $7.2 trillion dollars. 401ks alone dropped in value by about $1 trillion. But how does this drop in stock market wealth effect the economy?

The best recent estimate of the effect of stock market wealth on spending is from Chodorow-Reich, Nenov, and Simsek, who find that people spend about 3.2 cents every year for every dollar of stock market wealth they own. A decline of the magnitude we’ve seen, if it persists, would then lead to a decline in consumer spending of $230 billion per year, or 1% of GDP.

Jacob Robbins

Author: Jacob Robbins

Jacob Robbins is an assistant professor of economics at the University of Illinois at Chicago.

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