Stock Market Collapse Could Bring On Recession

Since the COVID-19 recession that started in spring 2020 began to recede, two things helped drive the recovery. Both had to do with the financial comfort middle-class and upper-class Americans gained quickly. One of these was the wealth they gained as the stock market sprinted to new highs. Another was the housing boom.

Most middle-class and upper-class Americans did not lose their jobs in early 2020, even though unemployment moved toward a post-World War II high. Job security was the foundation of their ability to put money into the market. Many were already invested through 401(k)s and with other money they believed would grow with the recovering economy.

The engine of the housing market also built confidence in home equity. Some of this, in turn, moved into the markets. The housing market is threatened by the incredibly fast increase in prices and the fact that mortgage rates, only 3% a year and a half ago, have begun to sprint toward 6%. In all likelihood, the housing market will cool and undermine some of the confidence homeowners have gained. When people face net worth problems they cannot control, their anxiety jumps.

The stock market is another net worth provider investors cannot control at all. There is the fiction that most people can pick stocks that will do well. There is no proof that this is true. In a market in which almost all stocks are falling, the challenge becomes impossible.

The stock market has declined 20% this year, and many stocks have dropped much more. For Americans who believed that tech shares would rise indefinity in a world that is tech-reliant, the awakening was even worse.

Some portion of consumer confidence is based on free-floating anxiety. People who have jobs, even well-paying ones, believe their financial future has eroded recently. Will stocks find a bottom soon? Maybe. Will the same happen with the housing industry? There is no way to even guess.

Consumer confidence is on a downward spiral. Consumers already have started to slow their purchases. It is the formula for an economic contraction.

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