Are Wall Street Worries Generating A Negative Feedback Loop?

Today the Associated Press reports that with Wall Street seemingly going haywire, a lot of people are too spooked to spend their money.

“Stocks have fallen four weeks in a row. Some on Wall Street worry that the resulting blow to

Spencer Platt / Getty Images

Some market analysts fear that what's happening on Wall Street is affecting the economy outside the trading room floor and vice-versa, creating a nasty feedback loop.

 confidence, not to mention 401(k) statements, has set off a spiral of fear that could push prices even lower, cause people and businesses to pull back and tip the economy into a new recession.”I’m nervous that fear will lead companies to stop hiring and people to stop spending,” says Jim Paulsen, chief investment strategist of Wells Capital Management, famous for his usually bullish take on the markets.A home sales report this past week showed that more sales than usual fell apart at the last minute, which suggests plunging stocks and dismal economic news gave buyers cold feet. At least 16 percent of deals were canceled ahead of closings last month, four times the rate in May.”

So…why is that news?

While that might seem like common sense to say, “Hey, the stock market’s not doing so hot, so I’m going to hold onto my money until the market and the economy get better,” economically speaking, it’s not.  As University of New Hampshire Economics Professor Michael Goldberg recently explained to State Impact, “We rely on markets, really, to synthesize [different] views to come up with…assessments of risk and the prices of assets.”

Or, as Bernard Condon and Christopher Rugaber put it in today’s AP piece,

“The stock market is starting to feed economic fear, not just reflect it.”

In short, as they quote later in the piece,

“‘A negative feedback loop … appears to be in the making,’ two economists at Morgan Stanley wrote Thursday in a widely cited report that itself seemed to beget more fear and selling. It warned that the U.S. was ‘dangerously close’ to recession.”