Got stocks? Look to the long term

When Wall Street takes a spectacular ride, whether you feel nausea or not depends on whether you consider yourself a passenger or passerby.

And that, in turn, depends on whether you have the luxury of ignoring the rise and fall of the financial roller-coaster.

“The stock market has a very important role,” said Dorsey Farr, principal in Atlanta-based French Wolf & Farr, an investment and wealth advisory firm. “But maybe you shouldn’t stop and read the ticker every time you pass a brokerage or go into a sports bar that has CNBC.”

Friday’s performance of the Dow Jones industrial average is a case in point. The well-watched market measure roared lower early in the day, then higher, then dropped, then soared, and finally finished down 128 points. That slippage seemed minor after a series of huge drops in recent weeks that left major stock indices down roughly 40 percent for the past year, resulting in one of the 10 worst markets of the past century.

Thanks to a massive bailout, election-year politics and near-constant coverage in the media, the spotlight has stayed trained on Wall Street.

Confidence has been rattled, but how much do jittery markets really matter to the nation’s $14 trillion-a-year economy? There are at least some reasons to see the triple-digit losses and shrug:

• Stock prices don’t typically impact day-to-day company operations. A profitable company is still profitable.

• Among the roughly 137 million American workers not laboring on a farm, an infinitesimal fraction lose jobs because the market plunges. For the rest, paychecks still arrive, meaning spending ability is unchanged.

Still, some people feel the roller-coaster’s vertigo immediately.

Right in the front seat are people preparing to retire and who are depending on portfolios. Along with them are investors who have counted on stock sales to pay bills, said Adrian Cronje, Atlanta-based director of asset allocation at Wilmington Trust, a wealth management firm. If you do not need to cash out anytime soon, “you have got to do your best to ignore the gyrations of the market,” he said.

Those gyrations have been mostly to the downside, despite the government’s proposed interventions that add up to hundreds of billions of dollars.

Eventually, those plans — however flawed — will bolster the credit markets and prevent financial disaster, argued Cronje.

“In the short run, what drives the market is emotion — panic, fear and greed,” he said. “In the long run, it’s driven by fundamentals.”

But at the moment, the stock market is afraid those fundamentals are fatally flawed. And while much of the economy can ignore the market for awhile, eventually its effects do reach into most corners of Main Street.

The link grows stronger as time passes.

“If you are not retiring in the next five years, then on a day-to-day basis, it shouldn’t affect what you are doing,” said economist Akila Weerapana, of Wellesley College. “The question is, what is your horizon?”

The farther out you look, the larger the market looms.

Public companies turn to the stock market, hoping to sell a stake in themselves in return for cash. While there are other sources of capital — loans and bonds, especially — issuing stock is a key means of raising money for expansion or just to operate the business. Lately, that has been growing much harder because of sagging markets.

“If firms can’t raise capital, they can’t keep plants running, they can’t build new plants and they can’t employ workers,” Farr said.

And consumers, whose spending accounts for more than two-thirds of the economy, look to the market for cues.

Consumers’ wealth is primarily found in their homes, as well as in stocks held individually, or as part of mutual funds or 401(k) plans.

When people believe they are richer, they spend more — but the reverse is also true.

For every dollar in declining market worth, a consumer averages 2.5 to 4.5 cents less in spending, Farr estimated.

But how dramatically Americans react can be as much about their heads as their wallets, Weerapana said.

There is good reason to be afraid, but fear can also sometimes feed on itself, he said. “What you are seeing is the psychology at work. Psychology does have a real-world effect.”