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discussion.fool.com - Control panel wealth effect feedback loop

Control Panel: Wealth effect feedback loop
Investment Analysis Clubs
Macro Economic Trends and Risks
Mar 16
14m
WendyBG
14m

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.

wsj.com - Slumping stocks threaten a pillar of the economy spending by the wealthy
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.
nytimes.com – 16 Mar 25
How Some Investors Are Protecting Their Money Amid Stock Market Woes

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.
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]

wsj.com - Investing stocks risk strategies trump policies
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

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