JKSE in Red Territory, How Much Should We Worry?

The Jakarta Composite Index (JKSE) moved lower at the close of trading today (6/6/2018). Almost all stock sectors are in the red zone as the Indonesia rupiah strengthened to IDR 13,851 per US dollar (USD). JKSE closed down at 19.078 points or 0.31 percent to 6,069.71. The LQ45 index is also dragged 0.45 percent to 969.45. The significance decline occurred in the agricultural sector by 1.67 percent, followed by basic industry sectors that fell 1.41 percent, and consumer goods that fell 1.16 percent.

Movements in the stock market can have a substantial economic impact on the economy and individual consumers. The incisive decline in stock prices could potentially cause widespread in economic disturbance. The most famous example is the fall of the stock market in 1929, which was a major driving factor in accelerating the great depression in 1930s. However, daily movements in the stock market can also have a smaller impact on the economy, because the stock market is not a real economy. Stock prices may change for various reasons – such as correcting overvalued stocks and even a big drop in stock prices will not always lead to lower corporate growth.

The economic impact that may occur if the stock price decreases is the wealth effect. People who own shares will see a decline in their wealth. If stock prices fall significantly enough, it will affect their financial outlook. If they lose money from their stock then they will be more hesitant to spend money; this may result in a decrease in the level of consumer spending. However, this effect will occur if it happens in a long-term loss, and should not be too significant because usually people who buy shares are wealthy and ready to lose a bit of their money; then their spending pattern usually does not depend on stock prices. Also, the wealth effect is related to consumer confidence. Bad headlines in the media of falling share prices can discourage people from spending.

The biggest effect of declining in stock prices is felt by investors who own shares. But that does not mean ordinary people will not feel the impact. Many private companies invest their employee pension funds in the stock market. A subtle and long-drawn decline in the stock market could lead to a fall in the value of their pension funds, and that could lead to lower pension payments when the employees is retire. In addition, the stock market can be a source of business investment, for example the company offers new shares to finance their business expansion. It can generate more jobs and growth in economics.

The weakening of JKSE may due to negative sentiment from the strengthening of the USD in the last couple day, and we cannot predict how extent the JKSE will fall because its movement is more caused by the panic of market participants. In any situation, investors should never be panic. Because when the market begins to recover, most investors often lose that moment. The investors will sell their shares too soon. In fact, the worsened in the market can only lasted for a moment.

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