Financial markets are often skittish, swinging between extreme optimism and outright panic — a phenomenon we’ve witnessed in dramatic fashion in the past few weeks.
In fact, there are a couple of old adages that brilliantly describe market behaviour.
The first is that stock market gains are built upon a wall of worry. And the other is that stocks go up by the stairs and down by the fireman’s pole.
That second one explains why you only ever hear of “billions wiped off markets” and not the billions slowly wiped on.
So, should we pay any notice at all to the shenanigans that routinely rock and roil our world?
The short answer is yes.
That’s primarily because the arcane world of stocks, bonds, currencies and derivatives trading — while generally unfathomable to most of us — can have profound real-world effects.
What’s more, those effects now have a much quicker transmission process into our everyday lives than they once did.
Wall Street vs Main Street?
Donald Trump and key advisers such as Peter Navarro have been trying to draw a distinction between what they call Wall Street and Main Street.
The message is that there’s no need to worry, everything will work out just fine in the end, and that the current meltdown is just wealthy traders chucking a tantrum.
Here’s what Ed Yardeni, one of Wall Street’s most prominent analysts, had to say about that:
“On Saturday morning, I nearly gagged on my bagel listening to a CNN interview with Peter Navarro.
“The president’s senior counsellor for trade and manufacturing declared that the tariffs are aimed at benefiting Main Street, not Wall Street.
“Other senior officials in the Trump administration, including Treasury Secretary Scott Bessent, have said the same.”
He went on.
“I have news for them: Wall Street is Main Street.
“Wall Street matters a great deal to Main Street. Main Street owns lots of stocks in American corporations that are facing massive disruptions as a result of Trump Tariffs 2.0.“
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‘Ordinary people’ increasingly invested in markets
Yardeni’s last point is extremely important.
Gone are the days when ordinary people simply stashed their cash in a bank account.
Back in the 1960s and 70s, you could get decent returns with absolutely no risk.
But as interest rates have fallen, more people have taken to the stock market, either buying shares directly in companies through exchange-traded funds (ETFs) or through investment vehicles.
According to the most recent survey by the Australian Securities Exchange, 51 per cent of Australians have direct exposure to the stock market.
Given the difficulties many younger Australians have in buying a house, a growing number have opted to put their savings into stocks.
And then there’s superannuation — our retirement funds overwhelmingly reach into the high-octane world of stocks.
Australia’s superannuation savings have grown to $4.2 trillion. And between them, our big super funds own about a quarter of everything listed on the ASX.
When markets move, we notice.
How does all this affect me?
There’s a phenomenon economists call the “wealth effect” — when we feel wealthy, we spend. When things turn ugly, we snap the wallets shut.
It’s a rule that applies even if there is no material change in the amount of cash in our pockets.
It’s become so entrenched, even the Reserve Bank of Australia factors it into its forecasts and its interest rate decisions.
What would make you feel wealthy?
When you’re paying off a house and the value of it suddenly surges — as we’ve witnessed during the past 30 years — home owners tend to be more relaxed about spending, even if on credit.
If things turn sour, and real estate prices drop, a large number of households may become worried that the value of their home is worth only barely more than their mortgage.
In those circumstances, they’re more likely to pull their heads in when it comes to spending.
The same goes for the stock market. If it’s booming and you own stocks, you’ll feel richer and start to spend, even if you don’t sell any shares.
Does this have an impact on the broader economy?
Consumer spending is the biggest component of our gross domestic product (GDP).
When people spend, companies earn bigger profits and are more likely to hire extra workers.
But if markets crash, there’s a noticeable drop in spending as investors concentrate more on trying to rebuild their lost wealth.
And that’s when things can turn ugly.
Lower spending, businesses going broke, workers being laid off — if the trend becomes entrenched, we end up in recession.
And that’s one of the big concerns right now, that the violent market shake-out could shatter consumer confidence and result in less spending.
Of course, that’s on top of the brutal impact of the tariffs themselves.
Tariffs ultimately are paid by the businesses and consumers of the country imposing them, meaning prices rise.
Those higher prices ordinarily would mean consumers buy less, which would result in an economic slowdown, possibly even a recession.
Larry Fink, the head of BlackRock, one of the world’s biggest investment institutions, expressed those fears on Monday.
“When you see a 20 per cent market decline in three days, obviously it has significant impacts and the ripple effects of the potential of tariffs is going to be longstanding,” he said.
“The market is impacting Main Street.“
