The pros are buried in it. But how deeply is the falling market burrowing into consumer psyches? It’s an urgent question for policy makers trying to subdue inflation while guiding the economy to a soft landing.
University researchers Marco Di Maggio, Amir Kermani and Kaveh Majlesi have one way to quantify it. Their 2020 study says every dollar lost in stocks leads to a 3-cent reduction in spending. After the five-month selloff, that’s about $300 billion zapped this year. Americans have about $18.5 trillion in annual disposable income, strategists at Bloomberg Intelligence say.
Viewed that way, the numbers depict a tightening squeeze, though one that by itself would need to get worse to seriously constrict Americans’ free-spending ways. As swift as the repricing has been, it’s coming at a time of elevated savings and rising pay for many workers.
Indeed, for a Federal Reserve bent on wringing excesses from the economy, the data may support bearish views that wealthy Americans remain richer than central bankers would like.
“Consumer net worth, household net worth are up so much,” said Jim Paulsen, chief investment strategist at Leuthold Group. “Everything you had on your balance sheet went up by so much for so long. I don’t care if it was a stock, bond, any commodity you had, rare art, I mean everything. So to the extent there’s a pullback, it’s a ripple.”
Yelena Shulyatyeva at Bloomberg Economics notes that wealth effects work with a lag and much of the market’s volatility has yet to land on sentiment. She uses a model that adds real estate to the psychological mix. Home-price gains slowed to 12% in the first quarter, and if that were to be annualized, she estimates stocks would have to drop 30% from their peak to “wipe out” the wealth effect from housing. If home-price gains slow further to 5%, the drawdown in stocks would already be large enough to scotch sentiment.
While there’s usually a hit to consumer balance sheets during market routs, Americans who own stocks generally count among the wealthiest.
“Most of the people who own stocks in this country also have a lot of accumulated savings, trillions of dollars in aggregate,” Brian Nick, chief investment strategist at Nuveen, said by phone. “And a lot of those folks are not highly leveraged. They’re not running up huge credit-card bills. They’re spending down cash savings.”
A quarter of household wealth is tied to equities, according to Wells Fargo estimates. That’s enough to pose a threat to spending if the selloff continues.
“When equities are down like this, it can weigh on sentiment. If we stay down at these levels, we could see that souring sentiment really start bleeding into consumer spending,” Anna Han of Wells Fargo Securities LLC told Bloomberg TV this week. “These are the indicators we’re watching, and the consumer is decelerating, but it’s not like the spending faucet is being shut off.”
To be sure, inflation and higher borrowing costs could have a bigger impact on consumer spending than stock-market levels, especially for lower-income Americans, a group that is less likely to own stocks. US consumer prices rose by more than forecast in April to 8.3% on an annual basis. Average household debt repayments will grow by $450 to $510 this year due to rising interest rates, according to Bank of America.