In the last decade, households have tended to shift out of bank deposits and money market funds and into stocks and bonds. Some analysts and journalists worry that the shift could be destabilizing to the economy and financial markets. Consumption spending, it is argued, might fluctuate more because households have invested in riskier stocks and bonds. Financial markets also could be more volatile because households might behave as short-sighted novices who will sell assets in panic at the first dip in the market. In addition, the pension and mutual funds through which households invest tend to trade more actively than households. The increasing role of such heavy traders, it is feared, might increase financial market volatility.> Morgan argues that these concerns, though understandable, are exaggerated. Households appear to be saving for retirement and are therefore likely to ride out short-term bumps in the market. Moreover, the market role of institutional investors has been trending up for 30 years without any accompanying trend in volatility.
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Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.
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