Bernice Garelick, 60, had felt sure that her husband Elias, a dentist, could retire in a few years and spend more time with her. But the crash shook her confidence. The Lindenhurst, N.Y., couple watched helplessly last week as their $300,000 portfolio of stocks sank in value by 20%. Said Bernice: "We have been investing in the market for 22 years. Now this happens, and it threatens what you have worked for over a lifetime."
She spoke for many Americans who felt their life's work and life's savings threatened last week. Since August, the plunging stock market has erased nearly $1 trillion of wealth that people had been counting on to buy new homes, pay tuition or secure retirement. For investors who had scored spectacular gains, on paper at least, the loss was calculated in the thousands, even millions, of dollars that vanished in a few hours.
Harder to measure but perhaps just as costly was the anxiety that rippled through the general public. Though only one in five U.S. households invests directly in the stock market, its gyrations can hurt everyone. People who had never bought a stock in their lives were struggling to figure out what the wild ride on Wall Street meant to them, their jobs, their families and their security. Businessmen feared that queasy consumers might stop spending as freely as they have been in recent years. Workers feared that a market collapse could usher in a recession that would cost them jobs or bonuses or take a bite out of their profit sharing or pensions. Those nearing retirement were concerned about the effect on pension funds and on investments that they will soon have to rely on for income. "It scares me to death," admitted a Miami homemaker, "because the market regulates everything."
Not exactly. But the market's health does have an enormous impact on consumer confidence, and thus on economic growth. The mechanism is as much psychological as it is financial. For the past five years, as long as the economy perked along nicely and the stock market bounded upward, it was easy for Americans to feel prosperous, whether they actually owned any stocks or not. Families were willing to take on mortgages to buy new homes, in part because they believed the economy would continue to grow and the value of the home would appreciate. Those who did own stocks enjoyed a dramatic increase in their paper wealth and felt free to spend more on new clothes, vacations, cars and theater tickets. That fueled the economic growth that fostered the widespread sense of well-being.
For many people watching stock prices plunge last week, that sense of security dissolved. "I feel a lot poorer today," sighed Bee Fitzpatrick, a New Orleans mother of two. Even if the market recovers some ground over the next few weeks, many people will still be uneasy about the future after seeing how far and how fast stocks can fall. As Columnist Robert Reno of Newsday, a New York newspaper, put it, "Nobody who has been on a falling elevator and survived ever again approaches such a conveyance without a fundamentally reduced degree of confidence."