What, me worry? Why Americans should relax about stocks
Americans watching the stock market may be feeling as if they had hopped on Mr. Toad's Wild Ride, given the wild swings of the past few weeks.
But the truth is that most Americans are fairly insulated from the day-to-day vagaries of the equities market, given that only about half of Americans are invested in the stock market, according to a Gallup poll. Most of that ownership is tied to retirement accounts, such as 401(k)s and IRAs.
Once long-term retirement savings are stripped out, only about 15 percent of Americans invest in the stock market, according to the Federal Reserve.
Meanwhile, for most people who are in the market, equities represent a fairly small fraction of their overall net worth. That's because the typical U.S. household has a median of $27,000 in individual accounts and $59,000 in their retirement funds, according to Fed data.
While plunging stock prices might stoke fears about a bear market or the strength of the economic recovery, most experts advise average investors to take a long-term view, and stress that the stock market isn't a barometer of the broader economy.
"When it comes down to it, market volatility does not have much to do with the average American," said Tim Hopper, chief economist at TIAA-CREF, which manages $869 billion in assets, including many retirement accounts for employees in the academic and medical fields. "To say the stock market is a reflection of the economy is a misnomer. It's small portion of the economy."
The U.S. stock market isn't in a bubble, according to economist Dean Baker, co-director of the Center for Economic and Policy Research, who notes that the ratio of the price of the S&P 500 stock to corporate earnings reached 27 to 1 in June, far below the high of 44 to 1 seen in the bubble of the late 1990s. In Hopper's view, the recent volatility represents a normal correction, rather than a bear market.
Indeed, the Nasdaq Composite is back in the black for the year after dropping nearly 14 percent in July and August amid growing fears about slowing global economic growth. The tech-heavy index on Tuesday added 127 points, or 2.8 percent, to close at 4,812. The S&P 500 (SPX) and Dow industrials (DJI) also surged after a selloff on Friday, although the indices remain in negative territory for 2015.
The recent bout of market volatility is no surprise, given slowing economic growth in China and the likelihood of an interest rate hike from the Fed, Blackrock global chief investment strategist Russ Koesterich said in a research note. That's likely to continue, in his view, but he noted that investors shouldn't start exiting the market.
"Investors should view this as an opportunity to take advantage of pockets of value that have emerged," he wrote, such as in international developed markets such as Europe.
Of course, that advice may only be valuable for the half of Americans who own equities. For the rest of the country, the bigger issue for Americans' financial health -- and their retirement outlook -- is the value of their homes, Hopper noted. While the daily swings in the stock market provide one yardstick to measure Americans' financial health, the value of residential property is far more vital to their long-term goals.
For one, homeownership remains more widespread than investments in the stock market. About 65 percent of Americans own a primary residence, according to Fed data. The median value of those homes also dwarfs the median retirement account, at about $170,000 for primary homes compared with $59,000 for retirement savings.
"Improvements in the housing markets have come a long way, and they are still improving," Hopper noted. "This is giving a lot more confidence to the average American that his or her own situation is better off today than it was five or seven years ago."