Monday, March 2, 2009

Dow Jones-ing For Some Good News

Source: Bloomberg

Watching the Dow Jones Industrial Average index move and up and down minute-by-minute in such volatile times is no doubt a good way to make your head explode. Trying to peg every twist and turn to some bit of news, such as a every time a deputy Treasury Secretary (if we even have any of those) picks his nose, is pretty silly if you ask me. After all, it's just an index of 30 stocks that has become even more distorted in the current crisis.

Unfortunately, though, as a Wall Street Journal story today points out, the stock market don't just reflect the economy -- it can actually impact it.

Even for families who don't have any skin in the stock market -- that's about half of the country -- stocks matter. A 1999 paper by Federal Reserve economist Maria Ward Otoo found that changes in stock prices affected the confidence of households surveyed for the University of Michigan's consumer-sentiment index whether or not they owned stocks. She concluded that consumers use the stock market as an indicator of where their wages are headed.

The stock market also influences corporate behavior. In a speech last month, former Fed Chairman Alan Greenspan related how in the late 1950s he found that changes in stock prices led to changes in companies' machinery orders. He recently updated the analysis and found that the relationship between stocks and corporate spending on equipment continues to hold.

"A recovery of the equity market driven largely by a receding of fear may well be a seminal turning point of the current crisis," he said. "The key issue, of course, is when."

As I said the other day, it's important that people regain confidence to get us out of this mess. Bad days in the stock market help perpuatate a negative feedback loop, in which people get even more nervous, spend less, leading to more layoffs, which makes people even more nervous, and so on. So on that note, seeing today's DJIA down 300.11 points sure doesn't help us.

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