If Stock Selloff Comes Back, Rich People May Buy Fewer Watches, ‘Pleasure Boats’, Goldman Warns

Readers will forgive me for recycling the first couple of paragraphs here from an old post. Simply put, sometimes I can’t think of a better way to say something than the way I said it previously, and this is one of those times, so if some of this sounds familiar, that’s why.

About a year ago, Donald Trump began testing out a new line at campaign rallies. That line:

How’s your 401(k) doing?

It was the culmination of 10 months’ worth of tweets about the stock market which had risen steadily since the election and which was on the verge of a pretty epic melt-up in January 2018, when the S&P blew through multiple analysts’ year-end targets in the short space of three weeks.

The problems with Trump’s 401(k) references were manifold. For one thing, it’s never a great idea to take credit for the stock market if you’re the president. That’s tempting fate, and it sets the stage for a scenario where, if the market falls, you either have to own the selloff just like you owned the rally, or else find a scapegoat.

Another problem with Trump’s “How’s your 401(k) doing?” strategy is simply that it’s not entirely clear what percentage of the President’s base actually has a 401(k). The data shows a very small percentage of workers in the lowest income quartile participate in workplace retirement savings programs and the figure for the 2nd quartile, while significantly larger, is still just ~35%.

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And that speaks to just how pernicious it was when, last summer, the administration started considering a move to use executive authority to deliver what amounts to an across-the-board tax cut for the wealthy. “The Trump administration is considering bypassing Congress to grant a $100 billion tax cut mainly to the wealthy, a legally tenuous maneuver that would cut capital gains taxation and fulfill a long-held ambition of many investors and conservatives”, the New York Times reported last July.

That was a flagrant slap in the face to the very same everyday Americans Trump claims to represent and who came out to vote for his populist agenda in droves in 2016. Importantly, it came on top of the tax cuts, the benefits of which overwhelmingly accrued to the wealthy in part because of the effect they had on corporate buybacks. By some accounts, those buybacks were in large part responsible for ensuring that U.S. stocks didn’t suffer the same fate as some other global benchmarks in the first three quarters of 2018.

Because financial assets (like stocks) are disproportionately concentrated in the hands of the wealthy, the benefits from rising stock prices do not accrue in a linear fashion. Rather, they accrue exponentially. And when it comes to the concentration of those assets, the juxtaposition is incredibly stark.

As Goldman writes in a new note out Tuesday afternoon, “the wealthiest 0.1% and 1% of households now own about 17% and 50% of total household equities respectively, up significantly from 13% and 39% in the late 80s.”

(Goldman)

That graphic speaks for itself. The rich get richer and in exponential fashion. While it’s true that QE exacerbated this dynamic, that was an “undesirable” side effect of an effort to reflate the global economy. When someone like Donald Trump implements tax cuts that he knows will catalyze a buyback binge and when that same Trump thinks about overriding Congress to implement changes that alter the way gains on those equities are taxed, you are witnessing a deliberate effort to exacerbate the wealth divide. Period.

Ok, but the point of Goldman’s note isn’t to fret about inequality. Rather, the bank sets out to determine whether the concentration of equity ownership has implications in terms of how stock crashes impact consumer spending.

“The claim is that declines in equity prices now translate into smaller declines in consumer spending than in the past, because wealthy households now bear a larger share of the losses and have lower propensities to spend”, the bank writes, adding that “if the wealth effect has indeed fallen, it would be one reason to expect only a modest drag on consumer spending from the recent sell-of.”

As it turns out, there’s some nuance to this discussion. As Goldman goes on to note, “household equity holdings have more than tripled as a share of disposable income at the aggregate level since the late 80s” and when you take those aggregate holdings and extrapolate from the breakdown shown in the chart above, you find out that “equity holdings as a share of income have risen substantially for the middle, upper-middle and upper wealth groups.”

In other words, as a share of disposable income, the only household net worth percentile that hasn’t seen a marked increase since the 80s is the bottom 50. The 90-99 percentile (which, as you can see above, has seen its share of total equity holdings fall slightly over the years), witnessed a veritable explosion in equity holdings as a share of aggregate disposable income, from ~25% in 1989 to ~55% in 2016.

Still, Goldman notes that it’s “possible that the wealth effect has fallen if spending by upper wealth groups is unaffected by stock market moves or if spending propensities have fallen across wealth groups.”

Well, the “problem” for consumer spending is that on the bank’s estimates, the top 10% of households now account for at least a third of aggregate consumption. And now, for the punchline. To wit, from Goldman:

Exhibit 4 shows suggestive evidence that equity price moves do have a meaningful effect on the spending of wealthy households. The PCE share spent on jewelry and watches is highly correlated with moves in the stock market (left panel). Using regressions of spending growth on stock price changes, we confirm this strong relationship more formally for jewelry and watches, pleasure boats and pleasure aircrafts (right panel).

So, the wealth effect from a stock market crash does still matter, irrespective of the explosion in wealth inequality. That’s because stock holdings have “more than tripled as a share of disposable income at the aggregate level” and also because, to quote Goldman, “equity price moves still have a meaningful effect on the spending of wealthy households.”

The upshot is that you can expect a drag on consumption in the event the selloff returns and when it comes to what types of things are likely to see decreased demand, you can look to jewels, watches, private jets and, of course, “pleasure boats.”