After two major stock market drops last week, Americans will likely pay close attention to the markets this week for signs of whether the volatility is an indicator of worse things to come. Last week’s turbulence grabbed headlines — and the eye of President Trump.
Trump has made a habit of using the stock market and its incremental fluctuations as a sign of the overall economy’s health. And, so when the market precipitously declined last Monday, the president took to Twitter to respond.
During his first year in office, Trump has eagerly taken credit for the 20 percent increase in the Dow Jones industrial average since his inauguration.
“The stock market has smashed one record after another, gaining $8 trillion in value,” Trump bragged during the State of the Union last month. “That is great news for Americans’ 401k, retirement, pension, and college savings accounts.” (We should note, Trump is not the first president to talk about the stock market in the State of the Union, President Obama touted the stock market in four of his State of the Union speeches.)
While relatively few Americans actively trade stocks or take a direct hit in their income when the markets fall, a 10 percent drop can affect our attitudes about the economy, says James Poterba, president of the National Bureau of Economic Research and an economist at the Massachusetts Institute of Technology.
When the stock market goes up, people typically spend more. Even if most of that spending is concentrated among people with high incomes, it still powers the economy. According to Poterba’s research, every extra $1 of disposable income in your stock portfolio leads to about 2 to 3 cents in additional spending.
“It might also have a psychological effect,” he added. “Even those who don’t have much in the stock market feel that it’s an indicator of how things are going.”
So a major decline in the markets could precipitate a pullback in consumer spending if enough people are unnerved psychologically. The risk for Trump is that presidential approval ratings often decline when the economy hits a rough patch. Trump is already quite unpopular with large parts of the electorate, but his approval rating has started to tick up recently, as more Americans also give him credit for the good economy.
Despite Trump’s conflation of the stock markets with the overall well-being of the economy, just a small percentage of American households own stocks.
“The most important thing to understand about stock ownership in the U.S. economy is that it is a very concentrated thing,” said Poterba. “Many people hold no stock at all and have no exposure directly to the stock market.”
Only 13.9 percent of U.S. families directly hold stocks, according to the most recent Survey of Consumer Finances from the Federal Reserve, and that number has been dropping year after year. If 401 (k) retirement accounts and mutual funds are included, that number increases to 51.9 percent.
Still, that means roughly half of all American families do not invest in the markets in any fashion (separate polls from Gallup and the Census Bureau back up this data point).
Moreover, stock ownership is concentrated among the wealthy — 84 percent of all stocks are owned by the richest 10 percent of Americans.
That number is actually a lot higher than it used to be according to Edward Wolff, an economist at New York University, who’s written on the topic. “In 2001, for example, the richest 10 percent owned only 77 percent of all stocks,” he said.
MIT’s Poterba points out that even among those investing in the market, three-quarters of American families own less than $25,000.
Most people investing in the stock market are white, college-educated, urbanites, according to the Fed’s survey. And, they’re more likely to live in the Northeast. The Fed data also found that those under the age of 35 or in a single-parent household are less likely to invest.
As a comparison, the Fed survey shows that 61 percent of white families own stocks, compared to just 31 percent of black families and 28 percent of Hispanic families.
NYU’s Wolff points out that age and racial stock market disparities are in line with overall wealth disparities, but it’s also evidence that blacks, Latinos and young people don’t invest in the market as much as their older white counterparts because they’re putting their savings elsewhere.
“African-Americans and Latinos have fairly low stock ownership rates, and that’s a reflection of the fact that most of their savings go into buying a home,” said Wolff. He said young people, despite stories to the contrary, are also opting for a home over stocks.
So rich, college-educated whites are disproportionately investing in the market, as are foreigners. Steven Rosenthal of the Tax Policy Center estimates foreigners own about 35 percent of U.S. corporate stock.
For most Americans who do dabble in the market, their investments are essentially retirement income, so except for those who are at or near retirement age, a one-day drop or two-week boom is unlikely to affect day-to-day finances. And that means for many people the immediate impact of a rocky market is mostly psychological. Still, for a president who’s banked his economic reputation on the health of the stock market — another turbulent week could be a risk to his ratings.