5. Education deferred
College funds, kept by many parents for their children’s higher education, are generally comprised in part of equities. A correction in the stock market drags the value of these funds down, and as a result makes paying for tuition harder. During the middle of the last recession, enrollment in low-cost colleges, and public community colleges increased an average 16 percent in 2009, according the U.S. News & World Report. “One reason: ‘reverse transfers.’ Students at expensive four-year universities are switching to lower-cost two-year schools to get their basics completed inexpensively.”
6. Unemployment
Businesses feel the ripple effects of a market collapse fairly fast. Some hold the money on their balance sheets in cash, but that is often mixed in with equities. A rapid and sharp drop in the markets can erode a company’s assets. This, in turn, makes it more cautious about expenditures, which includes payroll. The other reason companies review employment levels when the markets sell off is that the drop is likely to be the precursor of an economic slowdown. If a company sees a recession in its business coming it may lay off workers preemptively.
7. Car purchase
One thing that car companies found out three years ago is that consumer confidence is harder to come by when the market corrects by 30% or 40%. The psychological effect is only part of it. People with a part of their net worth in the stock market usually curtail their spending on anything more than the essentials until they see a rebound in value. And, after a huge correction, a rebound can take years. Added to that, much like a home loan, getting financing becomes much more challenging. J.D. Power & Associates lowered its estimate for U.S. auto sales in 2011 by 300,000 light vehicles to 12.6 million.
8. Small business start-up
Small business start-ups are not funded by venture capital money. People use their own savings or borrow from friends and family the seed capital needed to start a new company. A market sell-off hurts start-ups in two ways. First, it shrinks the nest eggs people might use to begin a new enterprise. Second, it makes it hard for the start-up to flourish as business and consumer confidence are low. The Wall Street Journal reports that according to the Census Bureau, the number of new companies that were started in the 12 months ended March 2009 was down 17.3% from a prior year — the fewest since 1977, when the Census Bureau began keeping records.
Douglas A. McIntyre
