The United States witnessed an amazing, meteoric economic-growth trend, from the depths of despair from the 2009 financial crisis to where we are now. In the last 10 years, we have gone from a near depression to record-setting highs in employment and the stock market. Unfortunately, markets don’t experience an uninterrupted, upward trajectory forever.
Wall Street professionals and experienced investors know that blazing-hot stock markets ultimately correct, leading to recessions or sometimes crashes. On Wednesday, we watched an ugly 800-point plunge in the Dow Jones Industrial Average, which serves as a bellwether for the stock market. Predictably, media outlets immediately went into a frenzy—predicting doom, gloom and a recession. Cable news had a field day, citing geopolitical events, inversion of the yield curve, trade war tensions and other fear-inducing sound bites as the cause to frighten viewers into staying tuned into their channels. The television journalists and newspaper writers could have calmly and dispassionately informed the public that the stock market corrections of 5% to 10% are common and we are long due for one, but that doesn’t generate ratings.
The worry I have is not so much the vagaries of the stock market, but rather the perception of the future direction of the stock market and its impact on hiring. The job market is closely correlated with the stock market. Stock prices are based on future earnings. If stocks are high, then investors believe corporate earnings and profits will do well. If the market is down, it could be because investors lack confidence in the ability of companies to generate growing profits in the future.
The large number—800 points—alarms the average person who is unaware of the fact that this is less than 3%, which is not so terrible. Stock market drops, accompanied by the negative sentiment among people and the media fanning the flames of possible recession and even worse calamities, set the stage for a general unease. Confidence in the future of the economy erodes. Executives worry about the future. When the CEO and upper management believe that the economy will slow down, they will hit the brakes. This entails laying off employees, instituting a hiring freeze and—through attrition—when people leave, they won’t be replaced. When enough companies do this, it becomes a self-fulfilling, downward spiral. A company may not want to be the only one hiring in a bad economy, as they will then have to let these people go later on. Potential job seekers will be concerned about leaving a relatively safe job to take on the risk of switching roles with another company—only to be fired in a few months. Older workers will put off retiring, as they see their 401k plans fall in value. New products, divisions and business lines won’t be started since there is worry and uncertainty about the future. Therefore, the jobs associated with growth won’t occur. Management will discontinue offering raises and bonuses. If stock market drops accelerate, the fear factor will increase and additional jobs will be cut.
Hopefully, the current mood is only part of a routine correction. Let us be optimistic that the stock market will bounce back, global political and economic tensions will ease and we will get back on track again.