Control Panel: Wealth effect feedback loop

The well-known “wealth effect” is the tendency of people to feel wealthier, and therefore spend more, when their investments increase in value. This is a double-edged sword which can boost the economy when asset values (homes, stocks, etc.) are high but suppress spending when asset values fall. This feedback loop exacerbates impacts in both directions.

https://www.wsj.com/economy/slumping-stocks-threaten-a-pillar-of-the-economy-spending-by-the-wealthy-c23cabd4?mod=hp_lead_pos3

Slumping Stocks Threaten a Pillar of the Economy: Spending by the Wealthy

Consumer spending is highly dependent on the affluent, who are highly dependent on the stock market

By Matt Grossman, The Wall Street Journal, March 16, 2025

The stock-market correction in recent weeks is more than a potential symptom of a slumping economy. It could cause a slump…

The mood has already turned gloomy, but the market drawdown might be just the start of a chain reaction that causes more collateral damage. … Falling stock prices could siphon the fuel out of two key engines of recent U.S. prosperity: robust spending by households and capital investment by businesses…

The top 10% of American earners now account for roughly half of all spending, up from 36% three decades ago… [end quote]

Many of the wealthy are older people. We have all seen bear markets before. We all know how to play musical chairs.

Both the New York Times and Wall Street Journal have articles today describing retirees who are shifting assets out of the stock market.

Ride Out the Market Turmoil? Not These Investors.

Some people are shifting their investment strategies as the stock market sours on President Trump, despite advice to maintain their savings and wait out the angst.
Danielle Kaye

By Danielle Kaye, The New York Times, March 16, 2025

[This young author interviews many people, some of whom are moving away from stocks and some of whom are staying pat. Retirees and people who need their cash soon should shift toward lower risk. The ending thought is interesting.]

Mr. Trump’s unpredictable and aggressive approach to policy has stoked Mr. Dinan’s worries about instability in the stock market. A Democratic voter, he said he hoped to move his savings back into stocks when the economic outlook cleared, or when there was a change in administration down the line.

Financial experts are “focused on things that are moving within the game as it’s played,” he said. “But they’re not planning for if the board game itself is taken out from under.” [end quote]

https://www.wsj.com/finance/stocks/investing-stocks-risk-strategies-trump-policies-c4a5d3d9?mod=hp_lead_pos2

The Days of Set-and-Forget Investing Just Ended for Many Americans

President Trump’s economic policies are sending investors out of U.S. stocks and into cash, bonds, gold and European defense stocks

By Joe Pinsker and Owen Tucker-Smith, The Wall Street Journal, March 16, 2025


The Trump administration’s chaotic mix of tariffs and government budget cuts have jolted legions of everyday investors, leading them to question the assumption that they should buy and hold stocks on autopilot.

The S&P 500, which had been delivering hard-to-beat gains, fell into correction territory this past week, with Wall Street fretting that the economy is sliding toward recession

Investors who have dumped U.S. stocks say they are searching for stability in money-market funds, short-term bonds, gold and international markets. European defense stocks have been a popular bet, premised on increased security spending in the region…

The share of investors who are bullish on the stock market is now at its lowest level since September 2022, according to survey data from the American Association of Individual Investors…[end quote]

While the stock and bond markets reversed a little on Friday, they are both in strong trends.

The stock market and the junk bond market are both headed down, indicating worries about the direction of the economy. The Fear and Greed Index is in Extreme Fear. The Cyclically Adjusted P/E Ratio shows the stock market is still in a historic bubble.

Oil is stable within its channel. Natgas is rising and has broken through its 200 day MA.

Treasury prices are rising (yields are falling). The trade is strongly risk-off as stocks and junk bonds are falling while Treasury and gold prices are rising. Gold hit $3,000/ ounce for the first time. Copper is rising faster than gold.

Margin was at a historic high in January 2025 but the data isn’t in yet for February and March when the indexes fell.

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2025 was -2.4 percent on March 6.

A correction of 10% in the stock market is small by historic standards. Is this just noise? Will the trend bounce back to growth? Or will the bubble collapse as so many have before?

European stock markets are rising as the DJIA is falling.

The METAR is a short-term prediction. The METAR for next week is cloudy. Unless something unusual happens there will be minor ups and downs. But Washington, DC has been Crazytown lately so there’s just no telling. Investors are nervous and they may fly away like a flock of geese that see a hawk. A few first, then many.

Wendy

11 Likes

It’s called “A positive feedback loop.”

Governors do the opposite, create negative feedback loops to smooth out the ride

The Captain

1 Like

Oh dearie me! We must give more tax cuts to those poor, suffering, people, who live in abject poverty on $30M/year. What do we take away from the Proles to pay for it?
/sarcasm

Steve

4 Likes

You can capitalize on that feedback loop if you have the capital.

Back in 2008-2012 when the world was collapsing and the “wealthy” cut back, I more than doubled my spending taking about a dozen cruises, doing a lot of international travel, and paying cash for a home at 70%-off it’s 2008 value. The highlight was a 7-day cruise of the Adriaric Sea from Venice for less than $500 on Royal Caribbean. It was almost cheaper than staying home.

When prices returned to more normal levels, I found I had less of an appetite for travel.

intercst

4 Likes

How are your US Treasury securities going to fare when “the board game itself is taken out from under”?

intercst

2 Likes

And successful investing is a long-term game – stocks for the long run.

I read Professor Siegel’s book when it was first published in 1994. I haven’t had a need for employment since.

intercst

1 Like

@intercst I worry about that. But if it happens the entire financial system will crash.

Wendy

2 Likes

Correct! There are events that don’t have a financial planning solution.

Excessive conservatism just makes it more likely that your failure point will be a pandemic, nuclear war, or a violent revolution.

Having a financial plan with a 1% chance of failure doesn’t do you much good if there’s a 5% chance of nuclear war.

intercst

1 Like

The last paragraph in this article says it all. You can instantly see why Pierce has the wealth that she has. Sure the couple has a combined high income, but they don’t spend it all. That’s precisely where wealth comes from. See, she has a 10 year old car, and she doesn’t have a $1000 a month car payment for a new-ish large SUV or truck like so many of the folks who spend all their income do.

She is planning to make another big purchase in the next few weeks. Mindful of potential coming tariffs, she wants to replace her 10-year-old car.

If US Treasuries go down for the count, everything else is going down or likely already has gone.

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Another “win” for “supply side economics”. Funnel more money into the hands of the “JCs”, and they have more to spend. Take more money away from the Proles, and they have less to spend. So now, the narrative is that, since the rich account for more of the economy, even more loot needs to be handed to the rich. Is anyone surprised?

Steve

I’m planning on replacing my 20-year old Nissan Altima with a 3-yr-old Tesla Model Y in the next 2 months. Avoiding the 3-yrs of depreciation on a new one and keeping the savings in the S&P 500 has probably “saved” me $100,000 on the deal.

I know, people hate it when I point that out, but that’s the kind of thinking that gets you into the top 10% without subjecting yourself to the supervision of an employer.

intercst

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I’m looking at Autotrader right now and virtually every Tesla is listed as a “great deal “ I suspect a used Tesla is cheaper than buying the batteries stand alone.

1 Like