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If gains in the stock market make American consumers happy what happens after a historic market plunge?

2 minute read

Americans were riding a high from record stock market numbers — they may feel different come April.

That’s because the American Institute of CPAs measures how pleased they are with their overall finances every three months. January’s shows the highest level in over two decades, says a recent survey from the institute.

Following an almost 1,200 point market plunge we haven’t recovered yet and potential impact from the new tax law, Americans may say different next quarter. Here’s why …

Volatile stock market

With a historic one-day plunge, we saw a big stock market “correction,” which is when there is a 10 percent decline from a high. It often takes a correction less than two months to end, but the last one took from summer 2015 to Feb. 2016, according to CNNMoney.

If it hits a 20 percent decline, that’s called a bear market, and it starts a downward spiral that can spur a stock market crash.

Historically, when the market takes a drop like this it tends to fall further, CNBC reported. It will definitely take time to recover.

David Cheryl, CPA and member of the AICPA personal financial planning executive committee, recommended caution in investing less than two weeks before the plunge happened.

“Americans should continue to reassess their personal risk tolerance, and work with their financial advisers to determine how to best approach investment decisions in 2018,” he said.

He warned that the market is unpredictable, despite steadily increasing past historical trends.

“Many of my clients have more confidence than ever in the market, while others are scared to death and have already taken considerable gains off the table,” Cheryl said. “The potential for volatility remains, but this market has thus far been immune to many of the factors that have resulted in large swings in the past.”

It seems he and some of his clients were right to remain cautious. What else could cause Americans’ feelings towards their finances to change?

Tax reform may change our minds

The Tax Cuts and Jobs Act was not taken into consideration with the AICPA’s most recent financial pleasure index.

Trump and Republicans have called the tax reform a “gift” to the middle class, but it seems many Americans feel it’s a greater gift to those who wrote and signed it. Two-thirds (66 percent) of Americans viewed it as a greater benefit to the wealthy, not the middle class, says a poll from CNN.

The law will lower the amount the amount the IRS can tax most Americans. Although businesses will see the biggest breaks, with a 14 percent cut to the federal corporate tax rate.

The average American should see an estimated $1,610 tax cut in 2018, says the Tax Policy Center. Take that number with a grain of salt though: They broke up American workers into five income brackets, and that’s the average of all five.

Economists predict short-term improvements in the economy, but ultimately the gains will fade off in the long term. Others have predicted this law will increase the federal debt over time.

Keith Hall, director of the Congressional Budget Office, a nonpartisan analysis for the U.S. Congress, wrote to lawmakers before the bill was passed. He said in his letter that the Tax Cuts and Jobs Act would increase the federal debt by $1.4 trillion over the next nine years.

Fears about the government’s ability to pay its bills and maintain services can feed fears about the overall economy and affect the stock market. So, will Americans still say they’re pleased financially in the next AICPA index this April? Only time will tell.

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About the Author

Joe Pye

Joe Pye

Joe Pye is a certified debt management professional. He served as Editor-in-Chief of Florida Atlantic University’s student-run newspaper, the University Press. He was a finalist for the Mark of Excellence award by the Society of Professional Journalists Region 3 for feature writing and in-depth reporting. He now covers personal finance topics for uncovering trends that help readers deal with the financial world. He graduated with a bachelor’s degree in multimedia journalism from Florida Atlantic University.

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