Last month, I wrote about the rather grim outlook for mortgage rates over the next five years, and the view is not good. Financing a house will be pricey for years to come based on a consensus from economists across the construction industry. Practically speaking, housing activity will be limited to the “have-to-buy” crowd, those homebuyers who are undertaking a move to a new job in a new city, have recently married and need housing, growing families, or others who don’t have the luxury to wait and stay put until mortgage rates moderates.
In the meantime, the vast majority of American consumers are staying put—and sitting on their hands as it relates to upsizing or downsizing from a housing standpoint. And except for the cohort of lower income Americans who are suffering through this current bout of inflation, much of the middle class and higher earners are continuing to keep their wallets open and are spending—despite the unhappiness with the current state of political affairs that normally cause consumers to close their wallets. And why? The outsized performance of the stock market.
As has been widely reported in the popular business press, the stock market isn’t the real economy; Nvidia’s share price won’t help your nephew find a job, or save for a down payment, or afford double meat and guac at Chipotle. There is a level of abstraction and distance from day-to-day, working-class life that can make stock watching seem exotic. But the enormous gains of equity holdings in recent years have changed the makeup and definition of wealth in the U.S., with even bigger implications. In a way that has only become true in the recent past, the stock market is actually getting closer to defining the economy—and consumption.
Our firm argues the stock market isn’t the economy, but it is influencing it like never before. Household net worth was more than eight times disposable income at midyear, marking an all-time high for that measure. For decades, Wall Street has delivered outsized, compounding returns, making equities and mutual funds an ever-greater portion of household wealth.
The value of households’ equity stake is nearly three times their annual after-tax income, so that means the S&P 500 gaining 10 percent in a year boosts a household’s capacity to spend equivalent to receiving a 28 percent raise. As a result, stock market moves can swing consumption and overall economic activity. Combined with sharp home price appreciation, surging portfolios have augmented consumers’ firepower far more than in any previous cycle according to the economists who have studied this topic.
This helps explain the years-long narrative of the resilient American consumer, the very people who spent their way through COVID, the aftermath, and are now sustaining periods of high inflation. Stock portfolios making up a higher share of a household’s net worth have meant consumption is more sensitive to equity market moves. In good times, stock upswings can override other factors weighing down the economy. Greater sensitivity has been a boon for activity in the current cycle, as increasing equity wealth has allowed households to spend more of their paychecks than they otherwise may have.
But some argue that sensitivity is two-sided. If the way the Wall Street winds are blowing has a greater say on the American consumer—because stock holdings increasingly define American wealth—that means the next bear market will have amplified influence. Instead of feeling rich and spending through it, consequently, people will feel vulnerable and pull back.
In that very real sense, a pullback in the stock market could be the influencer that would press consumers to close their wallets against the backdrop of sinking values, and the artificial influence that has driven spending would contract dramatically. But for now, the tailwind of AI and its consequences, like the Industrial Revolution before it, could drive markets ever upward for years to come.