TS Lombard’s chief US economist, Steven Blitz, sees the “golden era of Fed-controlled equity markets” coming to an end. (h/t The Market Ear).
As Blitz explained, if equity market weakness continues, with the S&P 500 SPX,
down 12% year to date, consumers may slash spending by the end of this year, if not sooner.
“The Fed’s communicated policy trajectory was intended to weaken equities — equities and the dollar are the Fed’s main conduits to impact the economy and, in turn, inflation,” said the economist, in a recent note. “An acceleration of current market weakness adds to our expected near-term downswing in spending and, more critically, threatens to embed a much weaker outlook for spending heading into next year.”
As for the connect between consumer spending and stock market performance, Blitz noted ties have tightened up since the global financial crisis of 2007-08, when households reacted by “long-tail deleveraging of their balance sheets.” He talked about how that sparked the Fed’s creation of an asset cycle centered on stocks, and households charged into equities because TINA [There is No Alternative] and the market only goes up, right?
His below chart shows how equities now, mostly, comprise a bigger chunk of household worth vs. early 2000. And as households sold into a late-90s rally instead of buying into the one that started in 2009, they are stuck with a higher cost-basis compared with the 2000 market crash. In short, they are more vulnerable to equity pullbacks.
The above chart notes, importantly, that young boomers (55 to 59) are most exposed to stocks — 46%, with the under 40 group least exposed at 3%. Generation X (40 to 54) owns 20%.
Why that matters?
“The combined 40-to-69 group accounted for 62% of consumer durables purchased since the economy bottomed in spring 2020. From here, it is easy to surmise that between satiated pent-up demand and falling equity valuations, consumer durable spending takes a hit,” he said.
Also consider that jump in cash relative to net worth as individuals age, said Blitz. The ratio is 15.4% for those 70 and over versus 11% for that young boomer crowd. “In other words, the 55 to 69 group likely begins to rebalance to cash, passively or actively. Regardless, equity market domestic demand shifts lower.”
The big question is how far will the Fed be willing to go to undermine confidence in its put — that is, market and investor belief that the central bank will step in to halt a slide in stocks.
“The Fed could very well end up undermining their future ability to drive household balances back into equities for the next upturn. The Fed’s ability will already be compromised to a point, anyway, by aging baby boomers rebalancing toward cash — a rebalancing aided by higher inflation and policy rates returning a yield to cash,” Blitz said.
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