The consequences of a world marked by the market

The writer is an adjunct professor at William & Mary and the author of an upcoming book on trust-based decision making.

“The markets are conspiring against me,” an international student told me recently. Between the dramatic rise in used car prices in the US, rising short-term interest rates, and the strength of the dollar, the monthly loan payment on the small sedan he had hoped to buy was unaffordable. What struck me, however, was that he reached his conclusion not because of a recent visit to a dealership, but because of his iPhone. At his fingertips, he had the real-time market price for each ticket.

She is not alone. Today, before buying a house, a plane ticket or new jeans, we consult the market price online. It is second nature to us. Thanks to the democratization of data, we, and the companies we work for, are very aware of the current market price of everything. We are active participants in a market-adjusted global economy, where it takes only a moment for a price change in a market to affect our real-world decision-making.

Consider the recent dramatic moves in oil prices. Data from GasBuddy, a company that tracks real-time fuel prices at more than 140,000 gas stations in the US, Canada and Australia, suggests it only took a few hours for costs at the pump in early March. to reflect the dizzying oil futures market. . And we all felt it, whether we filled up or just passed the big illuminated numbers that displayed the prices. The pain was immediate.

In an era of rising financial markets and disinflation, a market-adjusted economy is a beautiful thing. As we check out the in-app purchase on our phones, we smile knowing we got the best possible deal. And when we review our growing investment portfolios, we experience a dopamine rush that reinforces the wealth effect of higher asset prices. Amidst growing confidence, our pleasure-filled, market-driven mindset fuels a virtuous cycle in record time.

However, as the 2008 US housing crisis warned, a market-adjusted economy is anything but good news on the way down. The signaling effect of rapidly falling asset prices stings at us all the time. Two years ago, we saw a much broader replay as Covid brought down market prices and the global economy with it. As investors, consumers, and business leaders saw the world end together, so did financial markets, retail spending, and business investment. They were all marked at once.

Today, not only are even more segments of the economy marked out for online marketplace, but as my student experienced, supply chain disruptions and fears of inflation are roiling markets for stocks, bonds, forex and raw materials simultaneously. The real economy has become a punching bag for dour market sentiment as dramatic price moves run in parallel across multiple markets, amplifying the impact.

Historically, institutional investors and companies have been responsible for navigating the treacherous waters that rise when intense price volatility and the real economy collide. From futures to forward contracts, they have relied on financial markets to mitigate the impact by hedging and insuring price risk.

Today, they are joined by a new crowd, the retail speculators, who have very different goals. Thanks to today’s highly financialized markets, it’s now as easy for people to trade fixed income, currencies, and commodities as it is to trade stocks in companies like GameStop.

While that is concerning, what concerns me most is the possibility of crowd sentiment feeding on itself in a 24/7 online trading environment.

The signaling effect of rapidly moving prices can be powerful. A sudden crowd of bullish or bearish interest in a market now has the potential to create a quick economic spin-off, as the consequences of wild market price swings are immediately felt on kitchen tables and in retail facilities. manufacturing around the world.

Then there are the geopolitical implications as the fate of debt-issuing and commodity-producing nations swings with the crowd.

A global economy that is punctuated minute by minute by impulsive investor behavior presents enormous challenges for consumers, businesses, and policymakers alike. Much more than the economic stability of prices depends on the market.

They say what happens in Vegas stays in Vegas. That is not the case in today’s casino markets. As investor sentiment goes now, so goes the world.