The cratering market is blowing a big hole in consumer psychology

The professionals are buried in it. But how deeply is the declining market pressing on the minds of consumers? This is an urgent question for policy makers as they try to contain inflation and keep the economy in a soft position.

University researchers Marco de Maggio, Amir Kermani and Caveh Majlesi have a way of measuring it. Their 2020 survey says that every dollar lost in the stock costs 3-cents less. After five months of sales, this year has been about $ 300 billion. According to Bloomberg Intelligence strategists, the annual disposable income of Americans is about .5 18.5 trillion.

Seen this way, the numbers illustrate a tough squeeze, although it would be bad in itself for the Americans to severely shrink their free-spending ways. As the revaluation has accelerated, it is coming at a time of higher savings and rising salaries for many workers.

Indeed, as the Federal Reserve tends to outperform the economy, the data may support the bearish view that wealthy Americans are richer than central bankers.

Jim Paulsen, chief investment strategist at Leuthhold Group, said: “The net worth of consumers, the total value of households, has increased significantly.” “Everything you’ve had on your balance sheet has grown for so long. It’s a stock, a bond, you had a product, a rare industry, I mean everything I don’t care about. So as much as there’s a pullback, it’s a wave.”

Yelena Shulyatyeva of Bloomberg Economics notes that the effects of the asset are a reversal and that much of the market volatility has yet to subside in sentiment. He uses a model that adds real estate to the psychological mix. Home-value gains slowed to 12% in the first quarter, and if this is done annually, he estimates that stocks will have to drop 30% from their peaks to “eliminate” the impact of assets from housing. If home price growth slows to 5%, the stock drawdown could already be a substantial Scotch sentiment.

Although consumers usually hit the balance sheet during market routes, Americans who own stocks usually count among the rich.

“Most people who own stocks in this country also have huge savings, trillions of dollars overall,” Brian Nick, Nuvin’s chief investment strategist, said by phone. “And these people are not very high leveraged. They are not running huge credit card bills. They are spending cash savings. ”

Wells Fargo estimates that a quarter of a family’s assets are tied to equity. This is enough to threaten spending if sales continue to close.

“When equities are down like this, it can weigh on sentiment. If we stay below this level, we will see that the bitter feeling in consumer spending really starts to bleed, “Anna Han of Wells Fargo Securities LLC told Bloomberg TV this week. , But it’s not like the call to spend is going off. ”

To be sure, inflation and higher debt costs could have a greater impact on consumer spending than on stock-market levels, especially for low-income Americans, a group less likely to own stocks. US consumer prices rose 8.3% year-on-year in April. Rising interest rates will increase the average household loan repayment from $ 450 to $ 510 this year, according to Bank of America.

That said, the Fed’s work is already being felt in the financial situation, a measure of the pressure across equities and fixed income markets. De Maggio, a professor of finance at Harvard Business School, says it is at the top of the minds of policy makers when they are thinking about how their activities can reach consumers.

“They always think that if we set the rate, we will change the market,” he said over the phone. “And one of the key ways to spread it through the real economy is through portfolios.”

How falling stock prices affect consumer sentiment – already at its weakest level since 2011 – could be a point of contention, but one thing that is not the link between the collapse of a very large market and the economy. The 20% drop in the S&P 500 in the last 100 years has almost never been accompanied by a recession, a fact that could indicate a range of austerity measures the Fed is willing to impose on monetary policy.

To date, the central bank’s measures have only slowed a strong job market, with more open positions than people willing to meet and where the unemployment rate sits at 3.6%, close to a 50-year low.

De Magio says there is a backlash. “We are in a very good economy now. The stock market is falling, but the job market is still strong. ”

The trillion losses of stock assets have yet to be seen in retail spending. Data released on Tuesday showed that US retail sales rose at a strong pace in April, suggesting that demand remained stable despite massive inflation. Meanwhile, Bank of America data shows that payments rose 25% year-on-year in April, with total credit- and debit-card spending rising 13%. Travel and leisure spending continues to rise, the bank said.

“Consumer momentum and power are far more powerful than anyone thought,” said Dennis Debucher, founder of 22V Research. “It was a concern for us – consumers are too hot for the Fed.”

Fed chief Jerome Powell has backed the retreat in the financial situation, and one of his colleagues, Mary Daly, said he wanted to tighten it.

Lauren Goodwin, an economist at New York Life Investments and a portfolio strategist, says she predicts strong consumer trends in a few more months. On the bright side, low-wage workers have seen a particularly pronounced increase in wages during the epidemic recovery. Her main concern, however, may be the feeling of higher costs for everyday necessities like gas or baby formula.

“The key question for investors is whether the tug-of-war on consumer sentiment is starting to bring a real pull on consumer spending, which then ripples through the economy,” he said in an interview. “I would expect that there is strong consumer support up to this point, and that the real cash savings that consumers have accumulated during the epidemic, the impact on sentiment, including the impact on assets, have been exacerbated by those positive factors, but that is, of course, an important question to move forward.”

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