Question

What is the global significance of Wall street or stock market in U.S and why is it important? Also, what are global implications if say the market were to crash or go down? Give a thorough explanation please..

Answer 1

Wall Street has such a significant impact on the economy because it is the trading hub of the biggest financial markets in the world’s richest nation. Wall Street is home to the venerable New York Stock Exchange (now called NYSE ), which is the undisputed leader worldwide in terms of average daily share trading volume and total market capitalization of its listed companies. Nasdaq OMX, the second-largest exchange globally, also has its headquarters on Wall Street. Street firms together control trillions of dollars in financial assets, while New York is the second-largest trading center in the foreign exchange market, where daily trading volumes exceed $5 trillion.

Wall Street affects the U.S. economy in a number of ways, the most important of which are –

• Wealth Effect: Buoyant stock markets induce a “wealth effect” in consumers, although some prominent economists assert that this is more pronounced during a real estate boom than it is during an equity bull market.
• Consumer Confidence: Bull markets generally exist when economic conditions are conducive to growth and consumers and businesses are confident about the outlook for the future. When their confidence is riding high, consumers tend to spend more, which boosts the U.S. economy since consumer spending accounts for an estimated 70% of it.
• Business investment: During bull markets, companies can use their pricey stock to raise capital, which can then be deployed to acquire assets or competitors. Increased business investment leads to higher economic output and generates more employment.

Economic effects of the stock market

1. Wealth effect

The first impact is that people with shares will see a fall in their wealth. If the fall is significant, it will affect their financial outlook. If they are losing money on shares they will be more hesitant to spend money; this can contribute to a fall in consumer spending. However, this effect should not be given too much importance. Often people who buy shares are wealthy and prepared to lose money; their spending patterns are usually independent of share prices, especially for short-term losses. Also, only around 10% of households own shares – for the majority of consumers, they will not be directly affected by a fall in share prices.

The wealth effect is more prominent in the housing market. (e.g. falling house prices affect more consumers)

2. Confidence

Often share price movements are reflections of what is happening in the economy. E.g. a fear of a recession and global slowdown could cause share prices to fall. The stock market itself can affect consumer confidence. Bad headlines of falling share prices are another factor which discourages people from spending. For example, the stock market falls of 2008/09 reflected the fall in confidence. On its own, it may not have much effect, but combined with falling house prices, share prices can be a discouraging factor. However, there are times when the stock market can appear out of step with the rest of the economy. In the depth of a recession, share prices may rise as investors look forward to a recovery two years in the future.

3. Investment

Falling share prices can hamper firms ability to raise finance on the stock market. Firms who are expanding and wish to borrow often do so by issuing more shares – it provides a low-cost way of borrowing more money. However, with falling share prices it becomes much more difficult.

4. Bond market

A fall in the stock market makes other investments more attractive. People may move out of shares and into government bonds or gold. These investments offer a better return in times of uncertainty. Though sometimes the stock market could be falling over concerns in government bond markets (e.g. Euro fiscal crisis)