From the Wall Street Journal, November 9:
Investors’ rosy feelings about their stock market gains are powering spending—but it’s a different story for everyone else
A few months ago, with the market surging, Rick Wichmann watched his investment portfolio balloon in value. The 67-year-old retired consultant sold his Toyota and leased a new Tesla. After one of the air-conditioning units in his Brookline, Mass., home broke, he decided to replace the whole property’s HVAC system this fall at a cost of $72,000.
When stocks fell last week, he spoke to his financial adviser, who added some options to protect against declines. But Wichmann is staying in the market and doesn’t plan to cut back on spending.
“I’m fairly bullish about the economy,” Wichmann said.
Many Americans who own stocks are feeling good about their finances, with a market that’s continually shrugged off economic concerns and pushed major indexes to record highs. They have seen stocks dive through the dot-com bust, financial crisis and onset of the pandemic—only to recover and keep going up. Even after a big selloff following President Trump’s tariff announcements in April, and a smaller dip last week, the S&P 500 is up more than 14% so far this year. Gains in 30 top artificial intelligence-related stocks alone have added $5 trillion to household wealth across the country in the past year, according to an October JPMorgan Chase report.
Investors’ rosy feelings about having a lot more money—at least on paper—are powering spending on restaurant meals, business-class airline tickets, home improvement and more, keeping the broader economy humming.
It’s a very different story for everyone else. Americans with large investment portfolios feel markedly better about the economy than those who don’t own stocks, according to the University of Michigan sentiment index. Sentiment among people who don’t own stocks is at the lowest level on a three-month moving average since the university began tracking it in 1998.
***
This all makes the economy especially vulnerable to a stock market swoon. Gains in AI stocks are behind much of the market’s gains this year, so any downturn in that sector could reverberate through consumer spending across the country. Huge sums of money are being spent building out data centers to support AI companies, raising questions about a bubble.
The phenomenon of people spending more when assets they own go up in value is known as the “wealth effect.” For many people, especially well-off ones, the phenomenon is more psychological. While some people might sell their stocks to directly fund big purchases, other gains might be tied up in retirement funds or homes. Depending on market conditions, the gains could disappear in a moment. But looking at their portfolio makes people feel good about the state of their finances and the economy more broadly, so they’re more willing to spend more.
Economists have long found that people increase their spending when they gain wealth. For every $1,000 that their stock portfolio goes up, they might spend $35 to $50 more than they would have otherwise, according to research.
The wealth effect from gains in those 30 top AI stocks alone accounts for about 16% of the increase in consumer spending in the past year, JPMorgan Chase economists estimate.
“The stock market gains are providing an important boost to the economy,” said Karen Dynan, a Harvard professor and former chief economist at the Treasury Department. “It’s one of the reasons we’ve seen consumer spending hold up pretty well this year in the face of what people thought were going to be significant headwinds.”
Americans gained more than $63 trillion dollars in wealth from the first quarter of 2020 through the second quarter of 2025, according to the Federal Reserve. Real-estate wealth rose more than 61% during that span, while wealth from stocks and mutual funds went up 127%.
In years after the pandemic hit, lower- and middle-income households benefited from government stimulus payments and gains in home values meant the wealth effect was spread across income groups. Even though people across the income spectrum opened accounts at Robinhood Markets and similar outfits, the market’s big gains are largely benefiting the top 20% of earners, who own 87% of all stocks and mutual funds, according to the Fed.
Consumer spending, adjusted for inflation, is expected to rise about 2% in the fourth quarter from the year earlier, according to Oxford Economics lead U.S. economist Bernard Yaros. He projects that nearly three-quarters of that increase is from the wealth effect....
....MUCH MORE
Related, this weekend:
And some of the links therein:
"Redefining the Working Class Beyond white men in hard hats"
There
seems to be something akin to an actual plan to charge the plebs
everything they earn to cover food, shelter, and basic necessities and
further, to drive them into debt servitude to the tune of 5% - 10% of
annual income per year....
Unless You Deeply Understand How Inflation Hits Different Groups, You Don't Understand Inflation
When I say 'deeply' I mean having the empathy and imagination to actually 'feel' the emotions that result from having to comparison-shop food prices and then food prices vs other necessities."Evidence – And an Explanation – For the Recent Surge in Inflation Inequality"
It all comes down to financial assets and whether a person benefits from rising asset prices.
Lower income households feeling pressure: Campbell Soup CEO
Canned soup.
The laptop warriors who treat inflation as some sort of political game of 'gotcha' and one-upmanship are a bunch of sick mofos.
Is More Or Less Income Inequality Better For Market Returns?
Mesdames et Messieurs, welcome to Le Théâtre de l'Absurde...
"The Fed’s 2% inflation target is a source of growing liberal discontent"
This seems odd. The people most damaged by inflation are those without
assets, the poor and working classes, traditional Democrat
constituencies. If interested see Fed Vice-Chair (now director of the
National Economic Council) Lael Brainard after the jump....
Class War: Fed Governor Lael Brainard On "Variation in the Inflation Experiences of Households"
We've been observing this dynamic for many years:
As Commended To Our Attention By The World Economic Forum: Pods For Poor Plebs To Live In
One of the things that stands out about price increases is their disparate impact on various income levels and wealth classes. Some of our comments on this brutal reality:
December 2011
...One way to foment social unrest and even violence is to promote policy's that contribute to the rising costs of necessities, food, fuel etc.
I'm looking at you Professor Krugman.
It doesn't matter to people who are getting squeezed that the iPhone 4's price is dropping or that the BLS's hedonics say they're getting better quality in new cars when the price of gas refuses to go below $3.00.
June 2022
There seems to be something akin to an actual plan to charge the plebs everything they earn to cover food, shelter, and basic necessities and further, to drive them into debt servitude to the tune of 5% - 10% of annual income per year.
September 2022
The laptop class and above are impervious to price hikes for food, it just doesn't register.
Whereas for the working class this winter there will be no spending beyond food, fuel and housing.
With maybe a shared subscription to Better Huts and Gardens for some survival tips.*
And not to put too fine a point on it:
Understanding The Practical And Political Effects Of Inflation
with these back-links:
"The Cantillon Effect: Because of Inflation, We’re Financing the Financiers"
....As noted earlier today in the outro from "The Cantillon Effect and Populism":
There are currently no pure-play pitchfork manufacturers and it has been a long-cherished dream (since 2008!) to fill the void and/or live up to my junior high school personal file description: the instigator was....October 10, 2023
"China Considers Stimulus, Higher Deficit Spending To Counter Property Bust"
I smell
OscarCantillon.In which case the thing to do is determine who will get the money first and be that person. If it is not possible for you to quickly become a member of the Chinese nomenklatura determine how to make a portfolio bet on those who are already members of the privileged class. As noted a few years ago:
One of the rules of politics is "if your country goes communist you want to be as far up the apparatchik totem pole as you can get."
Preferably a commissar or above, putting you and yours closer to the commissary.
In a socialist paradise all pigs are equal but Hugo Chavez's daughter is a billionaire.
(actually $4.2 billion)
March 2021: If interested see also any number of posts on Mr. Cantillon's revelation*:
Cantillon Effect: Why Wall Street Loves Fiscal Stimulus (and you should too)
That is, you should if you have financial assets.
If not, you're doomed to a life of poverty at whatever level the powers-that-be think they can get away with....
*****
*...The key episode in Cantillon's life was his involvement with John Law and his monetary schemes. Cantillon was opposed to the inflationist theories of Law, but he understood how the schemes worked and what their fatal flaws were. Thus, he was able to create a large fortune from the Mississippi System and South Sea Bubble. In the aftermath of these financial debacles, Cantillon wrote his famous Essai, breaking out of the muddleheaded mercantilist thinking of his day to make a pathbreaking contribution to our knowledge of method, theory, and policy. Shortly after writing the Essai, Cantillon was murdered under mysterious conditions, and his Essai remained unpublished for more than 20 years....
