Market Meltdown Amplifies Baby Boomer Worries

If losing one’s job weren’t enough to worry about in this recession, for many Americans there’s the added angst of being able to afford one’s retirement.

And that may help explain why the seemingly relentless declines in home and stock prices have ravaged consumer confidence.

The depth of that damage will be evident later this month when the Federal Reserve reports on household wealth in the fourth quarter, which will pick up where the third quarter left off. At $56 trillion, it was some 12 percent below what it was during its peak in the third quarter of 2007.

“We won't be rebuilding wealth so quickly,” says Christian Weller of the American Progress and the University of Massachusetts, who specializes in retirement income security.

Weller says the decline in wealth is the greatest on record.

Housing prices are expected to bottom out until mid year at the earliest. Thus far, the median price of a home is down more than 20 percent from $219,000 at the market peak in 2007 to $170,000 in January.

Stock prices, however, have fallen twice as much, some 50 percent, from their October 2007 peak.

And while a greater percentage of Americans are homeowners than investors and thus the average household’s wealth is more defined by real estate than investments, the investment outlook is still a major force.

“There are more people involved in the equity market and have wealth tied up in it than the 1980s and 1990s,” says Christopher Rupley of Bank of Tokyo-Mitsubishi.

In 2008, 47 percent of all households, or some 54.5 million, participated in the market through equity or bond ownership, according to a joint study by the Investment Company Institute and the Securities Industry and Financial Markets Association. In 1989, only 39 percent were in the market.

Between 1989 and 2004 alone, the number of people in defined contribution (DC) retirement savings plans, such as 401(k)s, nearly doubled, from 36 million to 65 million.

Meanwhile, the value of those holdings has shrunk considerable. Americans held $15.9 trillion in retirement assets at the end of the third quarter of 2008, accounting for 35 percent of all household financial assets.

At the end of the second quarter of 2007, right before the credit crunch first bit, the value of those holdings was $17.4 trillion, equal to 40 percent.

Given the declines of the fourth quarter and the first two months of this year, both retirement metrics are even lower today.

“I think we’re prepared for people turning their 401(k) into 200k, but not for it to be 40k," says Rupkey.

In the current environment, the huge losses in the stock market may actually have a larger psychological effect than those of the housing market because of the more frequent reminders; the declines are measured daily and weekly, not just monthly, like housing.

While major stock market indices are at 12-year lows; existing single family home prices are a mere six-year low.

“The stock market is in a self-fulfilling negative spiral,” says economist David Jones of DMJ Advisors.

And unlike with housing, the government may be hurting, not helping the situation, say analysts. Though strictly speaking, there’s little the government can do to directly intervene in the market place, in the way it is doing with tax incentives for homebuyers, mortgage modification and foreclosure forbearance, analysts say it can certainly do more than it is doing.

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Some say the Obama administration has not even tried old-fashion jawboning by talking up the economy’s long-term prospects.

“Its early in the administration; they're new at this,” says Rupkey. “Maybe they don't feel they need to address it.”

Some say it is more than that. “The economic advisors are worried about the stock market because it is part of the puzzle, but it’s almost as if the politicians don’t care what the stock market is doing,” says Jones. “It looks like the economics group has lost the tug of war. You can't ignore it [the stock market] in building confidence.”

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Jones points to the President’s recent budget blueprint and what many see as a deficit-spending approach on top of the government’s already extraordinary spending commitment as a major concern for Wall Street.

Others say the President’s stated desire to raise the tax on dividends and capital gains from 15 to 20 percent when the Bush administration levels expire at the end of next year sent a negative message to Wall Street, even if it was consistent with his campaign comments.

Ryan Ellis, executive director of the American Shareholders Association, in a bit of an understatement says it “was probably not the best of times” to propose an increase in capital gains. “We've got enough uncertainty in the world,” says Ellis.

What's more, a higher capital gains rate may not pay off if investors continue to lose money because stock prices head ever lower.

Economists don’t expect the President to identify with investors the way he does with homeowners—and indeed the worst off homeowners are unlikely to even have a retirement account never mind investment portfolio—but its an important part to the overall dynamic of recession and recovery.

“If stocks continue to sink it will have a harmful effect on the economy,” says Rupkey.For more stories from CNBC, go to

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