(Bloomberg) — Time and time again, Jerome Powell has made it clear. Financial conditions, the Federal Reserve’s main lever for cooling the US economy, are tight.
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After an $11 trillion surge in U.S. stocks since late October and a sudden resurgence of meme-stock fever, many on Wall Street think he’s wrong. Not only are popular gauges of the investment climate quite loose, some are looser than before the Fed began its historic campaign of monetary tightening more than two years ago.
Rather than helping the Fed chairman in his legacy-shaping mission to defeat the threat of inflation at its core, the argument continues, the market frenzy for risky assets is working against his policy goals by encouraging Americans to consume in mass.
Still, the Fed’s latest data on household wealth helps explain Powell’s bullish stance on the link between financial conditions and the broader economy, and why consumer confidence remains stubbornly disconnected from S&P 500 gains.
Simply put, the fruits of the stock market boom remain unevenly distributed among Americans, given the epic disparities in wealth, especially between generations and racial groups, while capital gains are still modest when adjusted for the impact of inflation.
So while the stock market may cheer wealthy Americans, it does little to invigorate the less wealthy, who are trapped by inflation and struggling to service debt thanks to 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 tagline vibecesion was coined to describe the bleak sentiment among the electorate.
This view is strange to proponents of the wealth effect, a behavioral-economic theory that suddenly caught on during the global financial crisis, when central bankers actually engineered a rise in stock prices to spur household spending with some success. . Today, the stock market, at one level, would also appear to provide visible support for a spending boom rooted in stock gains. U.S. stocks have risen in all but one month since October, boosting retirement and brokerage accounts and, thus, giving consumers an excuse to increase their discretionary spending.
Going purely by value added, increases in capitalization over the five months to the March peak amount to around 38% of gross domestic product. That’s an almost unprecedented pace of wealth creation, according to data compiled by the Leuthold Group.
But the stock isn’t the only thing that’s up. The cost of living since Covid hit has risen 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 spending, up from 63.8% in 2019, according to JPMorgan Chase & Co. The difficulty 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 has been exacerbated by capital growth. While a record percentage of American households own stocks, there is a wide gap between the rich and the poor. The latter half has $0.4 trillion invested in stocks, a fraction of the $20 trillion owned by the top 1%, according to the Fed.
Wealthy people are spending a little more, but the impact is too small to be a major concern for Powell, said Mike Bailey, director of research at FBB Capital Partners.
Differences are also large by age and race. Americans 70 and older have amassed $15 trillion in stocks, nearly seven times the total for those under 40, Fed data show. Equity holdings among households 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 relative to the size of the economy, Leuthold data show.
The housing market has similarly worked in favor of an already wealthy class. While existing homeowners have locked in historically low mortgage rates, new buyers, especially young Americans, are finding homes harder to afford now that the Fed has raised interest rates to a two-decade high.
Low-income and younger segments of the population have lost out on the wealth effect, JPMorgan strategists including Joyce Chang wrote in a note this month as they explained the continuation of the vibecesion.
For now, optimism about further equity gains has been maintained. In contrast, consumer sentiment about the economy and personal finance fell to near two-year lows. So even if the rosy stock scenario plays out, don’t worry about a change in the atmosphere among ordinary Americans anytime soon.
Consumers are more upset about the prices they pay at grocery stores, for flights and hotels, said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance. And that angers them more than a hot stock market makes them happy.
–With assistance from Alex Tanzi, Isabelle Lee and Christopher Anstey.
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