Can somebody knowledgeable in economics educate me?

[TK421]

I’m kind of dumb about economics and I want to be more aware about something.

Why is it such a serious thing that the stock markets are going down? With my layman knowledge of the economy: people are traveling much less, going about much less, and probably spending much less despite hoarding a few things. People’s wealth and money isn’t disappearing into thin air they’re just (obviously) not spending as much right now, but they’re going to go back to spending once the pandemic starts to ease off and places re-open again. So what is the major relevance of going into a bear market? I’ve seen it on the news but I don’t understand the significance.

 

[1Lord1Faith]

I’m not that well versed in economics. But I believe the issues now have their roots in the Great Recession. This is evident by continuing low interest rates. The Fed did raise interest rates in summer of 2018 despite warnings not to do so. They quickly backed off and lowered rates again. It’s a sign of an unstable economy, relatively speaking. On top of that, and related to it, is that there is too much cash being pumped in the stock market and has been for all of the Trump years. Now, the corona virus has been the preverbal straw. I think there is more to it, but that’s just the basics.

 

[GEddie]

Bear markets (and their baby brother, market corrections,) are a normal part of economic life, up to a point.

At some point, the overvalued market will no longer sustain the high price, so buying tails off and the market falls. But in a normal environment, this too has a limit; when it falls past a certain point, those who sold out will buy back in at the lower price. As this picks up, the bear levels off again and in time goes bull once more.

(Supposedly, the animal names for the market came about because a bull strikes UPWARD with his horns, whilst a bear strikes downward with its forefeet.)

2020, however, is not a normal environment. The market crisis is being pushed by a physical cause, namely the 2019 virus. Because of it, cities and nations are in quarantine; people are not travelling; factories are not running because their hands are quarantined; events are cancelled, and economic activity those events would have generated is lost. None of this is likely to recover until the virus is overcome, which may take a long time.

In the meantime, profits are not being made, which will force the markets further down or delay the recovery. Jobs will almost certainly be lost because of economic life being suppressed; these people will have no money to pour back into the economy once life is OK again. The power for recovery may not be there for some time.

(I will run this by an amigo who is an economist and make corrections later.)

ICXC NIKA

 

[StudentMI]

If you’re interested in economics, I can recommend a couple books that are for beginners.

Economics in One Lesson by Henry Hazlitt
A Humane Economy by Wilhelm Ropke

 

[RepetantCatholic]

Well, I was an Econ Stats major in college and for a brief period of time worked in Finance. I’m cynical but here is my perspective.

The vast majority of people don’t invest. Those who do typically have a 401k plan which are typically limited in selection in things like mutual funds. So, anything that is disrupting the market can never be caused by every day people. Instead most holding are held by institutional investors like Investment banks and hedge funds.

To top that, a large chunk of the American Stock Market are international companies. So, while the Domestic Economy matters to the stock market to a greater extent more and more the international world is mattering.

So, what is going on right now is monetary policy makers around the world including America are flooding the market with cheap cash in the form of low interest rates. This cheap cash held by banks inflates the stock market. All the while most large companies because of low interest rates are holding a lot of debt. Hence, the market is volatile. The overall American Economy maybe doing well, that doesn’t mean corporations aren’t taking on risk and the international world isn’t doing so well.

What is helping the everyday person who doesn’t invest is cheap goods from China. Also, for the everyday person low interest rates translate into lower rate mortgages.

So what I always tell people is aspire for middle class, buy an affordable house in a good community you plan to live in for the rest of your life. Only go to an affordable college where you can work towards a license in a career. Have a certain amount of savings in cash.

Right now global policy makers are kicking the next recession down to a later period of time. This is speculation so take it with a grain of salt, but when that recession hits it’s going to be a doozy.