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Reverberations of a declining stock market

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A weekly presentation of downloadable charts and short analyses designed to graphically illustrate important economic issues. Updated every Wednesday.

Snapshot for March 21, 2001.

Reverberations of a declining stock market
When the stock market goes down, as it has since the beginning of 2000, the effects pervade all sectors of the economy. In real terms, the value of all outstanding shares fell by $1.7 trillion from the end of 1999 to the end of 2000 (Figure 1), resulting in a decline of 15%, the largest since September 1990 (Figure 2).

Figure 1: Real stock market value, 1990 to 2000

Although only a minority of households have significant stock holdings (greater than $5,000), the household sector is still the single largest group of owners of directly held equities. It lost $1.4 trillion in real terms over the course of a single year, representing a 27% drop. Given the importance of the “wealth effect” for the economy, this decline in the stock market, which became especially noticeable in the fourth quarter, contributed to sluggish consumption growth and led companies to invest less.

Figure 2: Real equity growth, 1990 to 2000

The household sector was not the only group to get hit hard by the stock market decline. Mutual funds and private pension funds also lost as the market turned bearish for the first time in decades. Private pensions had 10% less in equities, and mutual funds had 8% less. Most of the decline in equity values in different sectors of the economy is due to lower stock market valuations. Considering the importance of pension funds and mutual funds for the provision of retirement income, the decline in the stock market puts retirement income security at risk.

Source: Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States, March 2001.

This week’s Snapshot by EPI economist Christian E. Weller.

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