Here’s a chicken-egg quandary for you: Which came first, US macro exceptionalism or US equity exceptionalism?
It’s hard to say these days. We all know how the vaunted “wealth effect” works. Way back in 2010, Ben Bernanke explained it in the simplest terms. “Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending,” he wrote, elaborating on the many “downstream” benefits of QE. “Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
There you have it. The Fed’s mistake with QE wasn’t unintended consequences. And there was never any conspiracy. The (stated) goal was to inflate asset values, including and especially stock prices. But the Fed overestimated the extent to which asset price inflation would facilitate good outcomes in the real economy. Main Street needs a fiscal kicker.
When you pair the two — i.e., when the central bank funds expansionary fiscal policy on an almost dollar-for-dollar basis, as the Fed did in 2020 — you get results on Wall Street and Main Street. In hindsight, America overshot a little bit on that effort, and the result was cartoonish nominal growth and runaway inflation. But… well, “spilt milk under the bridge,” I guess. The bridge you live under.
Anyway, have a look at the updated chart below. The most recent Fed data on household wealth’s “current” through Q3 2024, and it shows that the cumulative gain in the value of household equity holdings since the Q1 2020 lows on Wall Street sums to an astounding $29.12 trillion.
Note that over the last four quarters alone, US “households” (the Fed’s definition of “household” in this context can be misleading, but I won’t delve into the specifics of that here) enjoyed a $12.5 trillion windfall.
The next update on that Fed dataset won’t be available for a few months, but you don’t need the numbers to surmise that Q4 2024 delivered another meaningful paper gain to Americans lucky enough to own stocks — the S&P rose 2% during 2024’s final three months thanks entirely to November’s near 6% election rally.
It’d be analytical malpractice to extrapolate January’s MTD gains out to end-March (i.e., to guesstimate the windfall for Q1 2025), but who doesn’t love extrapolation? Here’s a fun chart:
That’s from BofA’s Michael Hartnett. It plots the bank’s private client flows with the Fed series mentioned above. As you can see, they track each other closely. Or “map perfectly,” as Hartnett put it.
The implication: US households’ equity net worth probably rose more than $1.6 trillion in Q4, and it’s on track to rise by nearly $2 trillion more in Q1 2025.
That brings us full circle. The US economy, Hartnett wrote, is “exceptionally sensitive to asset prices [as] higher equity net worth equals more wealth that either supports consumption or gets recycled into risk assets.” That, he went on, is “a virtuous cycle” — a “self-fulfilling catalyst for US exceptionalism.”
I’ll ask the obvious question: What happens if stocks stop rising? If the bubble bursts?
What happens? Trump implodes cartoonishly. First POTUS ever to self-combust. But not before he arrests Powell.
What if people stop spending? Balance sheet recession? Very tactical, but looking forward, my average worker bee friends are not spending, instead, saving for major financial disruption under DT. Talked to 3 construction locals, all 3 said their pipe line was short – roofer, 2 GCs. Yes, local CA and insignificant breadth of data.
Asset inflation and tax cuts for the wealthy; regressive taxes and inflation for the poors. Will the gains from the wealthy encourage enough consumption to offset the reduced consumption from the poors when their expenses shoot up?
Also, I was reading the weekly and saw the percent predicting a hard landing is 5%. A hard landing isn’t my base case, but I’d bet heavily on the hard landing if you give me 20:1 odds. Aren’t these tariffs supposed to kick in February 1? Tax cuts seem like they are still a long way off. Trump is too busy going after immigrants, stripping aid from poor people in third-world countries, and tilting at windmills.
Everywhere in the world people still keep putting their monthly paychecks in US ETFs causing this virtuous cycle to continue. Track record of US has been better than Europe and EM. Also a lot of investors that started in the last 10 years don’t remember a time when stocks didn’t go up every 2-year period. It will take a lot to suddenly reverse those trends. Maybe Trump can do it if he screws up very properly somewhere, but by now i think it’s really difficult to break this habit.
If/when it does, and then the downtuen needs to persist for a serious amount of time as well (not like Covid or 2022 which both reinforced the btfd mentality), it will be tough for many. But for now there is still way too much dumb money chasing AI stocks, bitcoin, memecoins and what not.
Would be interested to see how the betting market has grown compared to the stock market over the last 15 years as well. Wouldn’t be surprised if the trend is similar. Free money during Covid messed up a lot of people’s relationship with it.
“Would be interested to see how the betting market has grown compared to the stock market over the last 15 years as well. Wouldn’t be surprised if the trend is similar.”
Great points JK.
News re. DeepSeek may upset the market properly as well. Those USD 100bn+ investments by MSFT, Meta, Stargate, etc., may depreciate rather fast. This hedge fund manager burns USD 6m to develop a disruptive AI model and can subsequently use his USD 8 bn hedge fund to trade off of the disruption.