Have American's Financial Struggles Shaken the Stock Market?

The relationship between economic performance and the stock market is not always aligned because company stocks are affected by a variety of elements outside the economy. Company news, industry performance,  investor sentiment, and political news are factors that could boost or kill a stock’s performance. This explains why the S&P 500, Nasdaq, and Dow Industrials ended at record highs following Donald Trump’s victory in the 2024 elections. However, shortly after this instant rise, new information made rounds, showing stock futures’ dip as investors shifted focus from the election results to key economic data. As much as the economy isn’t the only factor affecting stock market performances, it does have some influence. 

How much can the economy and consumer financial struggle affect stocks?  Find out in this article. 

Current Economic Status in the United States 

The economy has eased slightly into better grounds in 2024, and optimism in the country’s economy particularly grew in the third quarter of 2024. The GDP increased by 2.8% in Q3 and 3% in Q2 2024, which is slightly higher than the 2.5% increase witnessed in the previous year. Business investment is expected to attain a slower pace of 4.2% as opposed to the 4.5% recorded in the past year. Growth in exports might also slow further to 2.2% in 2024 and pick up in 2025. Imports, on the other hand, might increase to 3.8% this year. Government spending is likely to take a similar direction and is predicted to rise in 2024.

The differences in performance between 2023 and 2024 are minimal, but the slight improvements have influenced consumer behavior and sowed some seeds of positivity. Consumer spending came in stronger this year and could reach 2.4% before the end of the year, which is a fair increase compared to the 2.2% in 2023. Optimism in the economy grew to a high level this year, but many factors that affected consumer’s spending habits in the previous year still remain. 

A report released by McKinsey & Company revealed that, despite the boost in optimism and a better willingness to spend amongst consumers, the majority are still cautious. Middle and low-income consumers still face obvious financial struggles like low purchasing power and inflation. 

How Is Consumer Financial Status Related to the Stock Market?

Some indicators of a strong economy are better employment numbers, decreasing inflation, better wages, and increased retail sales. As the majority of these factors are yet to stabilize fully, investor pessimism and fear are likely to remain. These factors, coupled with other economic indicators in the coming months, will have a significant influence on consumer behavior within the investment market. That is, whether or not they buy or sell on trading platforms like OANDA and continue to invest in certain instruments. 

The subtle decline in S&P 500, Nasdaq futures, and the Dow in the past few days is enough to indicate this, as they are driven by expected economic news and policy changes in the coming days. The upcoming release of consumer price inflation data is one. This release could influence the Federal Reserve’s Monetary policy decisions. At the same time, a 25 basis point rate cut is possible in December, which investors are looking forward to. These upcoming economic data could sway FED’s policy trajectory, driving stock prices higher or even lower. 

The US stocks are not populated by financially savvy traders alone. Through retirement plans, a large percentage of Americans are exposed to the stock market. To secure lifelong earnings, it’s a common practice for citizens to multiply their money through stock market investments. In 2024, about 60% of households have invested in this market, as revealed by the Federal Reserve’s last survey of America’s finances. When economic performances indicate a tendency to drive these assets further down, the majority of owners may panic and sell off their holdings. 

The relationship between stocks and the economy is intertwined. When these companies perform better and show strong returns for investors, a drop in unemployment might follow suit, alongside an increase in corporate profits and better consumer spending. Lastly, when there are negative sentiments on stock performances, they sometimes ricochet to assets in the same industry. For instance, when the outlook for a particular retail stock suddenly turns negative, it often impacts other stocks in the retail sector as concerns spread and weaken demand across the board.

Will Consumer Finances Continue to Influence Market Dynamics? 

The simple answer is yes. Consumer finances are likely to remain a significant factor in shaping market dynamics. As household spending accounts for a large portion of economic activity, shifts in consumer financial health directly affect demand for goods and services. This, in turn, influences company earnings and stock performance. As long as other factors like rising inflation, debt ratio, and interest rates continue to shape consumer spending, investor sentiments will also be swayed from time to time.