It may seem a bit of a surprise to hear The Proper Home talk about economics. However, this is one of the most common questions we receive from homeowners. Homeowners who manage their homes with the Stonebridge Home Assistant receive our exclusive economic predictions every six months as a valued part of the Stonebridge Home Assistant program. Over the past five years, we are proud to say that we have presented forecasts with unparalleled accuracy and have offered our homeowners uncomplicated and accurate direction in a complex financial world.

Because of these uncertain times, we are receiving many more questions relating to the economy. We are going to answer a few important concepts in this post.

So, how does the stock market really affect the economy? The short answer is that it does not influence the economy – it is a reflection of you! The stock market is an indicator of how people feel about the economy. When people feel good, the market typically rises. When people do not, it often falls. In times like the ones were are experiencing now, market performance is of little or no direct value because it’s performance is tied more closely to speculative traders as opposed to active investors who are largely sitting on the bench. In other words, there are times not to trust what the markets and what the players are telling you – and now is one of those times. (We will change this statement when reality returns to the markets.)

Overall, the stock market’s greatest influence is with the financial behaviors of the greater public – people like you. While the market is only an indicator of the economy, it does have remarkable power to influence your financial world in a number of ways. Let’s take a closer look at some of these influences.

The “Wealth Effect “

When you own shares of stock, they will either rise or fall. When they rise, you feel more confident and comfortable spending. When they fall, we tend to stop spending. Because our economic value is based on consumer spending, when shares fall and we stop spending, shares often fall further. This is called the “wealth effect.”

The “Retirement Effect”

If you are a part of a retirement program or 401 (k), the chances are very good that your retirement grows through investments in one or more markets. Unfortunately, when the market falls, so too does your retirement! Today, many retirees and soon-to-be retirees are facing a retirement of work thanks to a poor economy and investments made through stocks and bonds that have failed or have performed poorly in the past decade.

Consumer Confidence

Unfortunately, consumer confidence is all too easily manipulated in times of uncertainty. Contributing to this effect is the fact that very few consumers have the depth of understanding required to understand everything that is happening in the world today that can impact their financial situation.

Great economic times spur consumer confidence and their willingness to spend. When times are tough, consumers stop being “consumers” and start saving. When consumers encounter news of a falling stock market, they stop spending or lose their capacity to do so as with the recent withholding of credit by banks.

In an economy supported by consumer spending, consumer confidence is the single most powerful influence on the overall economy.

Corporate Growth and Investment

When a company “goes public,” it secures a powerful new (and affordable) line of credit for financing future growth and debt. When a company wants to expand, it simply issues new shares of stock. However, when times are bad, this becomes more difficult and sometimes impossible.

When a company cannot raise funds, it may have to lay off employees to meet its obligations, which, in turn causes consumer spending and confidence to wane more. Unfortunately, share holders love layoffs for some reason and the company’s stock often rises on such news!

What It All Means to You

As consumers, most of us are tied to the economy and all too often Wall Street because that is where we have placed our retirement nest eggs and investment. All too often we have no other choice but to place great importance on financial markets because that is where we have chosen to place our fortunes and futures. This has the impact of making the importance of Wall Street greater within our lives than what it would otherwise be by virtue of association.

It is essential to remember that Wall Street operates exclusively on greed and fear. Corruption and underhanded dealings have turned Wall Street into a financial risk-taking wild-west adventure park for many people. Unfortunately, many have chosen to play the game and are confronting the reality of a financial system that is out of control, poorly understood, loosely regulated and is largely perceived as having lost its sense of shame. For investors wanting to grow their wealth and retirement, Wall Street has become a very dangerous and untrustworthy place to play. While there are rewards for the savvy investor, the risks are proving too substantial for the average investor to endure.

Warren Buffett, legendary investor, is famous for advising investors to not invest in things that they do not understand. That is true today more than ever. Your first step is to understand your investments – or risk trusting someone else to understand them for you. The latter rarely works.

So, what do you do? Believe it or not, many Americans are now checking out of the game completely – and outperforming the markets nicely along the way. We will cover these ideas in future stories.

An Interesting Side Note…

In a recent survey, we wanted to know the primary motivator for homeowners managing their homes with the Stonebridge Home Assistant. We discovered most homeowners wanted to protect and preserve their homes in a weak economy and uncertain times. We also learned that a large percentage of homeowners are staying closer to home these days and re-evaluating the value of “home” and “family.” This is a social effect known as “cocooning” and we believe it will play an essential role in the future of our economy and nation.

Stonebridge Homeowner Assistant Members…

If you manage your home with the Stonebridge Home Assistant™, this year we will be offering a free special series “America 2.0 – Thriving in the New Economic Reality” as a part of your participation. This program will become available in 2010 and will address many of the financial issues confronting homeowners and explore powerful new financial directions and alternatives for you and your family.

If you do not use the Stonebridge Homeowner Assistant™, please click here to learn more.

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