Time and again, Jerome Powell has made it clear. Financial conditions, the Federal Reserve’s key lever for cooling the US economy, are tight.
After an $11 trillion rally in US equities since late October — and the sudden revival of meme-stock fever — many on Wall Street think he’s dead wrong. Not only are popular gauges of the investing climate famously loose — some are looser than before the Fed kicked off its historic monetary-tightening campaign more than two years ago.
Rather than help the Fed chair on his legacy-shaping mission to vanquish the inflation threat at its core, the objection goes, the market frenzy across risky assets is working against his policy goals by encouraging Americans to consume en masse.
Yet the latest Fed data on household wealth helps explain Powell’s sanguine stance on the link between financial conditions and the broader economy — and why consumer confidence remains stubbornly detached from the S&P 500 rally.
Put simply, the fruits of the market boom remain unevenly spread among Americans given epic disparities in wealth — especially across generations and racial groups — while equity gains are still modest when adjusting for the impact of inflation.
So while the stock market may be cheering up rich Americans, it’s doing little to invigorate the less affluent, who are trapped by inflation and struggling to cover debts thanks to sky-high borrowing costs.
“Inflation is a pressure cooker, and that’s largely why consumer sentiment is so negative,” said Kyla Scanlon, a social media creator and video columnist for Bloomberg Opinion, whose label “vibecession” was coined to describe glum feelings among the electorate.
This view sits awkwardly for proponents of the “wealth effect” — a behavioral-economics theory that suddenly went mainstream during the global financial crisis when central bankers in effect engineered a rise in equity prices in order to induce household spending — with some success. Today, the stock market would, at one level, also appear to offer obvious support for a spending boom rooted in stock gains. US share values have risen in all but one month since October, swelling retirement and brokerage accounts and, thereby, giving consumers an excuse to up their discretionary spending.
Going simply by value added, increases in equity capitalization over the five months through the March peak come out to about 38% of gross domestic product. That’s a near-unprecedented pace of wealth creation, according to data compiled by Leuthold Group.
But stocks aren’t the only thing that’s gone up. The cost of living since Covid hit has surged by the most in living memory for the vast majority of Americans. On average, spending on essential items such as housing, food, gas, utilities and health care has reached nearly 65% of US household expenditure, up from 63.8% in 2019, according to JPMorgan Chase & Co. The hardship is more acute for the lowest income group, or quintile, with the proportion of such costs reaching 80.4%.
Wealth inequality also looms large — something that’s been made worse by the equity rally. While a record proportion of American households own stocks, there is a wide gap between rich and poor. The bottom half have $0.4 trillion invested in equities, a tiny fraction of the $20 trillion owned by the top 1%, according to the Fed.
“Wealthy people are spending a bit more, but the impact is too small to be a major concern for Powell,” said Mike Bailey, director of research at FBB Capital Partners.
The differences are stark by age and race, too. Americans at 70 and older have amassed $15 trillion in stocks, almost seven times the total for those under 40, Fed data shows. Equity holdings among families categorized as White add up to $35 trillion, while those labeled Black and Hispanic each have less than $0.3 trillion.
Another factor: The S&P 500 still sits roughly 2% below its 2021 peak when adjusted for inflation, and has yet to make up ground when compared with the size of the economy, Leuthold data shows.
The housing market has worked similarly in favor of an already-affluent class. While existing home owners have locked in historically low mortgage rates, new buyers, particularly young Americans, are finding homes harder to afford now that the Fed has hiked interest rates to a two-decade high.
“Low income and younger segments of the population have missed out from the wealth effect,” JPMorgan strategists including Joyce Chang wrote in a note this month when explaining the persistence of the “vibecession.”
For now, optimism on further equity gains are in store. By contrast, consumer sentiment on the economy and personal finances has sunk to nearly a two-year low. So even if the rosy stock scenario plays out, don’t bank on a vibe shift among everyday Americans anytime soon.
“Consumers are more upset about the prices they’re paying at the grocery store, for flights and hotels,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “And that has them more angry than a hot stock market has them happy.”
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