TS Lombard’s chief US economist, Steven Blitz, sees the “golden age of Fed controlled stock markets” as coming to an end. (h/t the ear of the market).
As Blitz explained, if stock market weakness continues, with the S&P 500 SPX,
12% YTD, consumers may cut their spending later this year, if not sooner.
“The Fed’s communicated policy path was intended to weaken equities: equities and the dollar are the Fed’s main conduits for impacting the economy and, in turn, inflation,” the economist said in a recent note. “An acceleration of the current market weakness adds to our expected short-term spending decline and, more importantly, threatens to usher in a much weaker outlook for spending next year.”
As for the connection between consumer spending and stock market performance, Blitz noted that the ties have grown closer since the global financial crisis of 2007-08, when households reacted with a “long-tail deleveraging of their balance sheets.” “. He talked about how that caused the Fed to create an asset cycle focused on equities, and households loaded into equities because TINA [There is No Alternative] and the market only goes up, right?
His chart below shows how stocks now, for the most part, comprise a bigger chunk of home value than they did in the early 2000s. And how homes sold in a late-90s rally rather than bought in the one that started in 2009, they are stuck with a higher cost. -base compared to the 2000 market crash. In short, they are more vulnerable to stock pullbacks.
Importantly, the chart above points out that young boomers (ages 55-59) are most exposed to stocks at 46%, and the under-40s are least exposed at 3%. Generation X (40 to 54) owns 20%.
Why does that matter?
“The combined 40-69 group accounted for 62% of consumer durables purchased since the economy bottomed out in the spring of 2020. From here, it is easy to assume that between pent-up demand met and falling sales stock valuations, durable consumer spending takes a hit,” he said.
Also consider that jump in cash relative to net worth as people age, Blitz said. The ratio is 15.4% for those over 70 versus 11% for the young boomer crowd. “In other words, the 55-69 group will probably start to rebalance in cash, passively or actively. Regardless, domestic stock market demand shifts lower.”
The big question is how far the Fed will go to undermine confidence in its put option, that is, market and investor belief that the central bank will intervene to stop stocks from falling.
“The Fed could very well end up undermining its future ability to get household balances back into equities for the next recovery. The Fed’s ability will already be compromised to some degree, anyway, by rebalancing aging baby boomers toward cash, a rebalancing aided by higher inflation and policy rates that return a yield to cash,” he said. Blitz.
Read: This is how the S&P 500 has to fall to enter another stock market correction
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