Consumer Spending & The Dow
The wild swings in the stock market continued today, with the Dow Jones posting its second largest drop in its history. That’s quite a fall.
And this comes on the coattails on Monday’s news - which saw record gains.
Today’s drop was precipitated by a number of factors - bearish remarks by Ben Bernanke, continued fear about the stability of hedge fund giant Citadel, and another sharp reduction in consumer spending.
According to the WSJ:
The degree of the declines is sapping consumer incomes after a decade showing few earnings gains for most Americans. In Seattle, 25-year-old Web developer Scott Krager is curtailing his spending — especially on eating out — and now rarely pays full price for anything.
Consumers are over-leveraged; we simply have too much debt. Most of our purchases — from flat screens to McMansions — have been financed with debt. That’s not sustainable.
But as this corrects, and consumers like Scott Krager start pulling back, that has significant ramifications on the economy and subsequently the stock market.
So we’re caught in vicious cycle.
We’re in the middle of an unprecedented credit crisis and a faltering stock market. This leads debt-burdened individuals to pull back in spending. In turn, that causes a reduction in the GDP and causes the stock market to fall further, bringing us back full circle.
When does this wheel stop turning?
