Friends,
Right now, consumer spending represents 68% of GDP in the United States. That means everything else -- government spending and business-to-business deals -- pales in comparison to the importance of everyday folks buying things.
With the onset of inflation 30 months ago, you'd think that such dynamics would spell disaster for the economy in the United States. But that hasn't happened at all.
How is that possible?
Dig a little deeper and it becomes clear: of all consumer spending, 49.7% is conducted by households in the top 10% of income (those earning over $250,000 per year). In other words, the top 10% of households account for over one-third of U.S. GDP.
Do you know what most high-income households like that aren't bothered by? Inflation. Sure, these folks pay more for groceries like everyone else, but it doesn't affect day-to-day spending habits.
The next question then becomes: what would affect spending amongst these households?
A falling stock market. That's because ~93% of stock market wealth is held by these families. When the market falls, these consumers feel pinched, and that affects their spending habits.
It creates a unique dynamic:
- In theory, the stock market should largely be affected by the health of the economy. Art (the market) is imitating life (the economy).
- In practice, we're in a peculiar position where their economy is starting to largely be affected by the health of the stock market -- or life imitating art.
None of this is to say that this is a good or bad. But as we try and square a falling stock market with signs that the U.S. economy is more resilient than seems possible, these factors will be important to remember.
Of course, over the long run, the market reflects the health of the economy. And the long run is always what should remain front and center.
But if we're looking to understand today's unusual environment, these dynamics go a long way in explaining what's happening.
Wishing you continued investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long Term Mindset
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P.S. We want to give a shout out to our friend Emily Flippen at The Motley Fool for bringing today's tidbit about US Consumer spending to our attention.
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