CAN STOCKS AND THE ECONOMY MOVE IN THE OPPOSITE DIRECTION?
The short and long answer is yes. Kai Ryssdal of Marketplace popularized the phrase just before the 2008 financial crisis: “The stock market is not the economy.”
You can have rising stock prices in a bad economy and a declining stock market in a strong economy. There have been many examples of this over the years. One telling fact that explains why this can be true is that there are over 33 million businesses in the U.S., while the S&P 500 includes only 500 companies. Additionally, nearly one-third of profits for the S&P 500 come from overseas.
WEALTH EFFECT?
There have been many attempts to statistically determine whether Americans spend more, driving the economy higher, when stocks are high, and spend less when stocks are low. The conclusion is inconclusive but given the growth of stock values and ownership over the last 40 years, it would be impossible to not have a greater wealth effect from stock values now than 40 years ago. From 1989 to today, stock ownership among American consumers has risen from 40% to 63%. My answer is yes; there is a wealth effect due to a rising stock market; exactly how much is just a guess.
Home values are the number one item on consumers’ balance sheets, over double the value of stocks. So, yes, there is a wealth effect due to home values, and it has the potential to be much greater than the stock market wealth effect. Once again, pinpointing the exact amount of this effect is up for debate.
Common sense tells us that consumers feel better when the assets they own are worth more, and when consumers feel better, they spend more. Remember, 70% of our GDP is driven by consumer spending.
JOBS MARKET? INFLATION?
The jobs market is the number one economic indicator in my book. You can look at GDP and many other indices, but nothing spurs consumer spending like a new job with higher pay. Home buying is particularly dependent on the job market. Companies can achieve larger profits through labor efficiency, which can translate into higher stock prices, but this does not necessarily spur consumer spending. This is exactly why politicians, from Washington to your local mayor, do backflips to attract businesses that create jobs. New businesses also raise tax revenue, which increases political power for politicians. What politicians do with the extra money is an argument as old as time.
INFLATION?
The facts are that we can have low inflation with a growing economy and good employment figures, or high inflation with a stagnant or declining economy. A correlation does not exist in the long term. The Federal Reserve sometimes forgets this.
(Next month’s newsletter: potential source of huge electrical energy)
Thanks, Andy McClung CFP TM
Investopedia Peter Gratton; Elvis Pecardo; Federal Reserve Bank Ravekumar Karson; U.S. Bank.com
2025 Market Results
S&P 500 +6.1%
NASDAQ Composite +6.9%
Dow Industrials + 2.5%
Russell 2000 -2.8%
World ACWI +9%