Stephen Blitz, chief US economist at TS Lombard, sees the “golden age of Fed-controlled stock markets” coming to an end. (free market ear).
As Blitz explained, if the stock market weakness continues, with the S&P 500 SPX,
By 12% year-to-date, consumers may cut spending by the end of this year, if not sooner.
“The stated objective of the Fed’s policy trajectory was to weaken stocks — stocks and the dollar are the Fed’s main channels for influencing the economy, and thus inflation,” the economist said in a recent note. “The acceleration of current market weakness adds to the expected near-term decline in spending and, more importantly, threatens to imply a much weaker outlook for spending in the year ahead.”
As for the link between consumer spending and stock market performance, Blitz noted that ties have tightened since the global financial crisis of 2007-2008, when households reacted by “delivering the long-term indebtedness of their balance sheets.” Talk about how this led to the Fed creating the asset cycle focused on stocks, and loading families into stocks because TINA [There is No Alternative] And the market just goes up, right?
The chart below shows how stocks now, for the most part, make up a larger portion of a household’s value versus the early 2000s. With households selling in the late 1990s rather than buying in the market that began in 2009, they are stuck at a higher cost-base compared to the crash. 2000 market. In short, they are more likely to fall stocks.
The above graph indicates, importantly, that the baby boomer generation (55 to 59) has the most exposure to stocks – 46%, with the under-40 group having at least 3%. Generation X (40 to 54) owns 20%.
Why is this important?
“The combined group of 40 to 69 has accounted for 62% of consumer durables purchased since the economy bottomed out in the spring of 2020. Hence, it is easy to speculate that between saturated pent-up demand and declining stock valuations, durable consumer spending needs to be hit , “He said.
Also consider the monetary jump in relation to net worth as people age, Blitz said. The rate is 15.4% for those aged 70 and over versus 11% for this group of baby boomers. In other words, the 55 to 69 group is likely to start rebalancing cash, passively or actively. Regardless, domestic demand in the stock market is trending downward.”
The big question is how far the Fed will be willing to go to undermine confidence in its position – that is, the belief of the market and investors that the central bank will step in to stem the slide in stocks.
The Federal Reserve may end up undermining its future ability to return household balances to stocks for the upcoming recovery. Blitz said the Fed’s capacity would already be compromised somewhat, however, by rebalancing the elderly baby-boomer generation toward cash — rebalancing with the help of high inflation and policies that restore the return on cash.
Read: Here’s how low the S&P 500 must go to enter another stock market correction
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