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The sharp decline in the stock market isn’t just a problem for Wall Street.
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Main Street consumers can be spooked by market pain, leading them to cut their spending.
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Recent weak consumer sentiment data coincides with this year’s steep sell-off in stocks.
“The stock market is not the economy” is a common refrain.
The thinking goes that while losses in the stock market may hurt Wall Street investors, Main Street is the real backbone of the economy.
While that may be true, stocks are an important psychological lever and there is a threshold for losses, beyond which the pain in the market can spill over and hurt consumer spending.
That’s the thinking that underpins the concept of the “wealth effect,” or the idea that rising and falling asset values have a material impact on consumers’ spending habits.
In other words, when the stock market rises and consumers see swelling investment portfolios, it instills confidence to keep spending even if their actual incomes haven’t moved. On the flip side of that, losses in the stock market can curtail spending as people watch their wealth on paper decline.
“I think this is the most important thing for people to understand that’s unique about the US economy, is what we think we manifest,” Sherry Paul of Morgan Stanley Private Wealth Management told CNBC this week. “We’re a 70% consumptive GDP society so how we think and feel actually has a material impact on how we spend.”
With the S&P 500 down nearly 10% from its peak and having wiped out $5 trillion in value, it’s no surprise that recent economic data has shown consumers starting to pull back on their spending habits.
Retail sales dropped 1.2% in January, representing the biggest monthly drop since July 2021, and sales in February rose by 0.2%, much less than the 0.7% economists’ forecast.
While downbeat consumer sentiment and weakening data can be tied to the uncertainty coming out of the Trump administration, it is also likely affected by the plunging stock market.
Kristina Hooper, chief global market strategist at Invesco, said in a recent note that the latest commentary from companies, including Macy’s and Delta Air Lines, suggests a slowing economy, partly driven by wealthy Americans dialing back.
“Affluent consumers in the US are likely to be reducing spending at least partially because of the substantial stock market drop, which has historically impacted perceptions of net worth and negatively impacted consumer spending,” Hooper said.
