Any day now, the Dow Jones Industrial Average may surpass 30,000. This represents enormous gains in the stock market.
Everyone loves the party game “Two Truths and a Lie.” Can you spot which one of the following statements about the stock market isn’t true?
A. A higher share of Americans own stock than ever before.
B. Only Americans who own stock are affected by the stock market.
C. The stock market generally performs better when Congress is on recess.
A. TRUE. A generation ago, about 30 percent of Americans owned stock. Now that number is above 50 percent. This is in large part due to the popularity of 401-K retirement plans that automatically invest in stock. But it’s also due to the strength of today’s economy. We’ve also seen increases in the number of young Americans (under 35) who own stock, as well as the number of women who own stock. As Quartz reports on the phenomenon of more Americans investing, “In an age of widening inequality, this is a rare bright spot because it means more Americans own a share of an expanding economy.”
B. FALSE. The stock market is not the economy, but the two are linked. And fortunately for Americans, both are strong right now. Of course, people who have much of their money tied up in stocks have the most to gain (or lose) from those investments. But the stock market can have a ripple effect on the economy and on opportunities for non-investors, even for the least fortunate. For example: If a charitable foundation has an endowment, and some of that endowment is invested in the stock market, a strong market will allow the foundation to offer more scholarships, build more hospital beds, or do whatever service they provide. We should all root for a strong market.
C. TRUE. This funny phenomenon is a theory called the “Congressional Effect,” and it’s been studied and documented by several different researchers. Maybe investors feel more comfortable reaching for and opening their wallets when they think Uncle Sam is not. Or perhaps investors simply feel some uncertainty about economic policy when Congress is in session (and the rules might change, for better or worse) versus recess when no legislative changes are on the table. Sadly for the stock market, Congress is in session most of the time!
Stay tuned to IWF for more updates on markets, including the marketplace of ideas!