Two things can be true at once: the majority of U.S. households own stocks and are getting richer as Wall Street hits new highs, yet the gains are thinly spread. As U.S. workers’ share of national GDP slumps to an all-time low and fears of an AI “jobpocalypse” grow, this broad but concentrated equity ownership is assuming greater significance.
Can the so-called “wealth effect” – people feeling richer and spending more as asset prices rise - offset other, more challenging economic forces bearing down on the average Joe?
The financial fortunes of Americans have never been more dependent on Wall Street. Over 60 per cent of households own stocks either directly or indirectly, and a third of U.S. households’ total assets is in stocks, a record-high share.
Thankfully for them, Wall Street continues to boom, largely due to the artificial intelligence frenzy. As a result, net U.S. household worth as a percentage of disposable personal income has never been higher, excluding the pandemic-related distortions of 2021 and 2022.
But given this backdrop, why is consumer confidence, by some closely watched measures, at a record low?
The answer is partly that the wealth effect is not equally distributed.
Half of the country has barely any exposure to the stock market at all, while the richest 10 per cent account for 90 per cent of U.S. equity holdings. It’s even more concentrated at the top. The richest 1 per cent of the population owns half of the country’s entire stock market wealth.
In other words, the enormous equity hoard at the top is skewing the aggregate picture and helping to entrench the “K-shaped” economy, where the rich are doing well while the rest of the population is struggling.
Indeed, workers are falling behind by several measures. Bureau of Labor Statistics figures show that U.S. workers’ share of output has dropped to a record-low 54.1 per cent. Meanwhile, unemployment may be poised to creep higher amid the rising global threat of AI replacing workers – or, as one bank CEO called them, “lower-value human capital”.
Add to this an energy shock and spiking inflation, and it’s clear why American consumers may be warily eyeing their pocketbooks, regardless of what’s happening on Wall Street.
Indeed, earnings reports and outlooks from some of the largest U.S. retailers this week indicate that a shift in U.S. spending patterns is underway – and it’s mostly downwards.
Home Depot said demand is expected to remain choppy as customers are scaling back on large home improvements, while rival home improvement chain Lowe’s also signaled a squeeze on spending due to the weak housing market.
Most telling, perhaps, TJX, the parent company of discount retailer TJ Maxx, raised its outlook because more cost-conscious consumers are flocking to its stores from more expensive competitors.
And Walmart stuck to its conservative annual sales and profit targets, as rising fuel costs drive value-seeking shoppers to its low-priced groceries and essentials.
So has the “wealth effect” become a luxury good?
Perhaps it has, but it could still help keep the broader economy humming.
Analysts at Credit Insights believe the wealth effect is functioning as a “meaningful economic and political narrative offset” to the current gloom weighing on large swathes of U.S. consumers.
Bank of America is also pretty optimistic, arguing that equities would have to go into a “sustained bear market” to slow higher-income spending and effectively close the ‘K’ in the ’K-shaped’ economy via negative wealth effects.
As a reminder, wealthy Americans account for a huge chunk of total U.S. consumption.
However, research by Generali Asset Management strikes a more cautionary note – and it was published before the Iran war sent energy prices spiking.
Generali strategists argue that because equity ownership is so concentrated among older, wealthier households – and much of their spending is discretionary – consumption growth fueled by positive wealth effects will be narrower than in the past and also more sensitive to market volatility.
Their models suggest that an 8 per cent decline in the stock market would lower GDP by nearly 0.4 per cent, “with the actual impact likely larger given the current outsized role of wealth effects.”
Warnings about the demise of the U.S. consumer have proven false all year, in part because of the stock market boom. But given everything that is being thrown at Americans today, Wall Street has some heavy lifting to do ahead.