Tuesday, July 7, 2020
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How today’s stock drop could affect learning

US stocks posted their biggest decline in more than seven months, the Wall Street Journal reports. Analyses suggested investors retreated from fast-growing technology stocks and rotated money out of the tech sector due in part to the recent jump in government-bond yields.

Rising bond yields are something of a double-edged sword, the New York Times writes. On the one hand, the bond yields go up when the economy is strong—unemployment levels are at their lowest in about 49 years. On the other hand, the yield is a baseline for key borrowing costs, including mortgage rates, which makes it more expensive for people to borrow money.

When companies have to pay more to borrow money—or, for that matter, import goods from other countries, like China in the tech market—that money comes out of shareholders’ earnings and stock prices plunge.

It may be a blip, but many analysts feel this is more of a correction and may hold. “As much as it’s painful short term, it’s actually really healthy longer term that they’re pulling back,” the Journal quoted Andrew Slimmon, senior portfolio manager with Morgan Stanley Investment Management, as saying. He added that after a reset in these momentum stocks, he could see these company shares rising again into the end of the year.

If this is truly a correction to stock prices that are artificially high, though, and the correction is prolonged, a few key groups are at risk:

  • pension plans with pre-defined benefits, as among teachers
  • universities with endowments that aren’t exactly liquid

Universities, especially those with large endowments, depend on the draw-down from those endowments every year in order to pay for operations, while many private citizens have pensions in defined-benefit plans, including teachers in Illinois. Many government units that fund those pension plans have left them grotesquely underfunded. Falling stock prices will make that worse.

The problem with the pensions is that many teachers become teachers because of those pension plans. In Illinois, teachers don’t pay into Social Security in order to receive those pension benefits. If the stock market crashes or undergoes a major downward correction, governments will try to push those teachers’ pensions downward, saying the money’s not available to pay them out. Then, young future educators would start looking for a different profession that didn’t depend, long term, on the stock market.

Paul Katula is the executive editor of the Voxitatis Research Foundation, which publishes this blog. For more information, see the About page.

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