How do big swings in the stock market affect consumer behavior?
How do big swings in the stock market affect consumer behavior?
All three major U.S. stock indexes — the Dow Jones, the S&P 500 and the Nasdaq — rose Tuesday. It was a similar story in other markets too. After Monday’s biggest single-day drop in almost 40 years, Japan’s Nikkei largely bounced back Tuesday. European markets did too.
So is the freakout over, or is it too soon to tell?
And, even if it is over for now, how do big dips in the market affect consumer psychology and behavior?
To get a sense of how people are feeling about the economy, look at how often they’re Googling “recession.”
That’s one of Justin Wolfers’ favorite gauges, anyway. He’s a professor of economics and public policy at the University of Michigan. “It used to be that that would only spike during really bad times, like really deep recessions,” Wolfers said.
But in the last couple of years with inflation high and the Federal Reserve raising interest rates to try to slow the economy, he said people were Googling “recession” a lot. Even though there wasn’t one. And in the last couple of days, with the big drop in stocks, “people are back to Googling the word ‘recession’ like crazy,” he said.
To Wolfers, that says more about media coverage of the market than it does about the market itself — and it says a lot about psychology.
Syon Bhanot, an economics professor at Swarthmore College, said humans tend to feel losses more acutely than gains.
“So if the stock market goes down by 2% in a day, that’s much more likely to trigger an emotional reaction than the stock market going up by 2% in a day,” said Bhanot.
Even if the drop is short-lived.
“So imagine you go to a casino, you win $1 million with your first hand, you lose $1 million with your second hand. Do you feel the same as when you walked in? I suspect you won’t,” said Bhanot.
He said people react similarly to swings in the stock market, and that can affect how we behave. “Perception is everything in the economy,” Bhanot added.
Wendy Edelberg at the Brookings Institution said that even though the stock market is not the economy, of course, it does have a big effect on people’s perceptions of the economy.
“Generally speaking … volatility in the stock market is bad for consumer spending because it just makes people worried about what the future holds,” said Edelberg.
Even if the market bounces back quickly, she said, big drops can make people less likely to trust the gains.
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