Recently, the stock market suffered two of the largest one day drops in history. Even if you are not heavily invested in the market, it does affect you. Before we dive in, we need to give a short explanation of how the stock market works. NOTE: There are numerous factors to consider too lengthy to list here. Therefore, this is brief overview of the market in very general terms…
Companies offer stocks (individual parts of the company) that can be bought by investors. The money from stock purchases is used to run companies. Investors buy stocks at a certain price that is determined by numerous factors. As these factors change, so does the value (price) of each stock. Investors make money by buying stocks as a lower price, and selling them when they are at a higher price.
To prevent massive selloffs as stock values increase, dividends (money the company pays out to investors as its stock’s value increases) and stock splits are offered to shareholders. So shareholders want companies to make profits so stocks values rise, dividends rise, and they make more money on their investments. Any factor that prohibits or slows this “process” is hostile to a shareholder and could result in a selloff of stocks. This is how the stock market decreases.
Now that we have this understanding, I want to draw your attention to some key points in an article about the recent stock market drops…
“The historic Dow Jones drop that occurred on Monday was in part a reaction to Friday’s jobs report, which showed stronger wage growth than at any point since 2009.”
What does this mean?
The stock market reacts negatively to higher wages earned by employees. The latest monthly jobs report included data that showed a wage increase. While this is great and welcomed news for employees, it is not great news for the companies they work for. The obvious reason is the companies are paying out more to employees, so their costs of doing business go up. If not leveraged correctly, a company loses money when it increases wages for its employees. So how does this affect the stock market? Read the next key point…
“As companies sink more money into wages, there’s less left for shareholders.”
What does this mean?
Shareholders, otherwise known as people who have invested money in a company, expect to make money off their investment. They don’t want to a little money. They want to make a lot of money! This means their interest (making money) is in direct conflict with your interest (higher wages as an employee). It is crystal clear: as companies sink more money into wages, there’s less (money to make off their investments) left for shareholders. Who wins this battle? Shareholders, who are necessary because of the money they invest in a company, or wage earners, who are necessary because of the work they do for a company.
“Wage growth also contributes to concerns about inflation — another drag on corporate profits and the expectation thereof, which is what motivates the stock market.”
What does this mean?
Wage growth contributes to concerns about inflation (a rise in the overall cost of living due to a rise in the cost of goods and services). Higher wages mean a company has to recover losses due to paying higher wages. An easy way to do this is to raise prices of their goods and services. This leads to inflation (notice the expression “another drag on corporate profits”). If higher prices result in fewer sales, corporate profits take a hit here, in addition to the hit taken from paying employees higher wages. These two losses mean less money for shareholders, which will lower the stock market if they decide to sell their stocks.
Now that we have a better understanding of the stock market, one must think about a few things and ask a couple questions:
- If you do not buy stocks, or have the “disposable income” to do so, why not?
- Who does the company you work for value more: you as their employee or their shareholders?
- Who is not in favor of wages rising for employees, because it could negatively affect the stock market?
- Who benefits most when the stock market rises?
- Who tries to get out of the stock market when it starts to decline?
- Who is more likely to own large amounts of stock: a poor/middle class person or an upper class/ wealthy person?
- Why are economics, finance, and the stock market not taught more in public grade and high schools where public education is free?
Please understand this issue is all about color. The color I am referring to is not white or black. The color is green (money). When we realize green controls everything AND it “trumps” all other colors, we will understand this has nothing to do with most issues that divide us. It has nothing to do with race, greed, skin color, gender, religious affiliation, sexual orientation, or political affiliation. The stock market only deals with money. For those heavily invested in the market, anything that causes values to increase is good. On the flip side, anything that causes value to go down is not good. Unfortunately, this includes higher wages for working people.
Wake Up! The stock market impacts wage increases… and you!