Over the past several weeks, the US stock market has been bouncing up and down like it hasn’t done since the recession back in 2008. The daily swings and huge one-day drops and gains in the major markets have caused a lot of speculation and even panic as the bull market that saw the Dow Jones Industrial Average rise to a record 18000.00+ has transitioned to a bear market falling to as low as 14750.00 during that time period (minus about 20%).
The causes of this volatility are being called by some experts “a market correction”, which periodically occurs after large gains are made and profits are taken by investors. The US market has also been heavily influenced by other world markets, most recently the decline in China and Japan. Our market had been gaining now for years since 2008 and had reached all-time highs just very recently. But the beginning of “bear market conditions” can be a longer term activity than a correction indicates and if that’s what is happening, it can affect you whether or not you are an investor.
How Stock Market Turmoil Affects Everyday Life
How can it affect you?
- When stocks decline and bear market conditions exist, it can affect your employer and their willingness to fund such things as your benefits. You may see a decline in your retirement plan investments. It can also mean increases in the cost of company healthcare and dental programs as the contracts come up for renewal. In some cases, it can even mean reducing the benefits or dropping them entirely. If you’re self-employed, you may have more control over these items, but stock market volatility can affect your larger clients and the amount of work they contract out to you.
- If the economy becomes sluggish due to stock market declines, you may find that your income is likely to stagnate or even decline as it has in the years since 2008 until very recently. This may cause you to cut back your investment in your 401k plan or skip the contribution while you use that money to supplement your current income to pay for expenses. Market declines can spark inflation due to their effect on company sales and cash flow, thus making your daily spending subject to price increases.
- Home purchases and home sales can be dramatically affected by stock market declines. From the last recession, 20% of all homes proceeded to short sales and foreclosures as homeowners found their homes “under water” due to falling home values and their inability to make payments after easy credit allowed them to “overbuy” their homes. Credit will tighten up under stock market volatility and selling a home and getting mortgages can become much more difficult.
- Saving your money for a child’s college education may have to be deferred if you now need that money to use for day-to-day expenses in an economy that is inflationary and income-stagnant or declining. This may affect the choice of colleges down the road or even postponement of pursuing higher education.
- Your job itself may be at risk if the market causes so much pressure on businesses to cut their expenses, with payroll being the largest expense that most companies have. Payroll cuts and layoffs can occur.
The recent drop in foreign markets have made people worry about our situation here in the US. While American investors are not deeply involved in the Chinese market, the market there can and will have an impact on the Chinese economy and thus American companies. The economy there, with its billions of consumers, will affect American companies’ sales there negatively and that impacts their business at home, and therefore you.
What should you do?
There isn’t much you can do to change the course of economic trends, and worrying every minute of the day about what you hear and read isn’t very positive or helpful. No one really knows how far and to what extent the markets will ebb and flow. We can only look at history to guess what will come tomorrow. But we do know that being prepared with a financial plan can soften the blow.
Frugality has been my way of cushioning situations like this one. Being frugal means several important things. Don’t waste money. Buy only what you need and leave wants for times of surplus. And think twice even then if you have consumer debt or you don’t have your savings in order. Make some sacrifices to your budget to protect your retirement contributions and important monthly payments like home mortgage requirements and health insurance premiums. Reduce debt and build your retirement, education, and emergency funds—these are the last things you want to reduce or abandon in times of recession.
Another way to prepare for lean times is to diversify your income. With multiple sources of earnings, if one dries up, at least you can rely on the others until you replace what was lost. Similarly, you want to diversify your investments by looking at your asset allocation. Too much money kept in any one type of investment leaves you susceptible to drops in that area.
I think reviewing your financial situation periodically can prepare you rather than waiting until a crisis happens. And when stocks start dropping, it isn’t time to panic or pull your money out…remain proactive, not reactive.
Have you been worrying about the volatile market news? What experiences have you had since the last huge change in the stock market recession of 2008? What lessons did you learn? What do you think you can do to prevent negative impacts on your personal situation if the bear market occurs and the world markets continue to decline?
Image courtesy of Photokanok at freedigitalphotos.net (with changes)