(Bloomberg) — Stocks weathered the Jackson Hole confab to rebound this week. But for bulls looking to be made whole after last year’s shellacking, the road back is longer than they realize.
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Equities rose for the first time in four weeks, with the S&P 500 now recovering roughly 65% of last year’s bear-market drop. Factor in inflation, however, and the size of the retracement is less — only about 45%, adjusting for the consumer price index. Plotting the S&P 500’s value against nominal gross domestic product shows a similarly paltry recovery compared with the size of the economy, according to data compiled by Doug Ramsey at the Leuthold Group.
In short, thanks to battered buying power, an $8 trillion advance in stocks isn’t what it used to be. With debates raging around the impact of rising borrowing costs and rapidly depleting savings on consumers, the shrinking bang of the stock market’s deflated buck has implications for everything from the economy’s health to the future of Federal Reserve policy.
“The stock market has recovered a large share of its losses, but thanks to accumulated inflation since the market top in early 2022, real wealth is not as large as one might think,” said Ramsey, the firm’s chief investment officer. “You might be disappointed by what your recent stock-market gains can buy.”
The S&P 500 notched its best week since July with traders sifting through a slew of central bank speeches Friday. Stocks, and in particular megacap tech names, have staged big recoveries as investors looked ahead to the end of the Fed’s rate-hiking cycle, and as hype over artificial intelligence helped to boost prospects for companies with ties to that industry.
Intrigue over how much wealth is getting created tends to crop up whenever the market’s shooting higher, as it has for much of this year. The market isn’t the economy, but can be considered a leading indicator as rebounds in stocks tend to be followed by recoveries in the business cycle. An equity advance can lead to greater consumer confidence, with those who own stocks feeling rich, if just on paper.
As stocks rose this year — alongside consistently stronger-than-expected economic data — calls for recession got pushed out. Whereas some economists had expected the US to enter into a downturn sometime this year, many now see it posting better numbers — and a smaller rise in unemployment — during the second half of the year.
Focus has turned to the state of the US consumer, whose cash cushion built up during the pandemic is fast dwindling. In the past two years, they have — in the face of high inflation — drawn down about $2 trillion of that savings.
Fed Chair Jerome Powell and co. have made progress on getting inflation to cool, readings remain above their target. Prices are still growing, though at a slower rate, and households continue to face elevated costs for things like groceries. Powell said Friday that price appreciation in the economy “remains too high” while warning the central bank is prepared to raise rates further to bring it down to 2%.
In other words, selling stock following the rally won’t “fund” the same house, car or amount of groceries as it did in late 2021, Leuthold’s Ramsey said. “If you think you’re going to take the gains and roll them into a second home, you might be disappointed,” he said.
There’s a contingent for whom that might have a silver lining: the Fed. Some officials recently posited that their work in tightening financial conditions could be proving “more substantial than anticipated.”
“The implication that it would have for the Fed, in my mind, is that we’re not really living in a market that is irrationally exuberant, so that’s good news,” said Art Hogan, chief market strategist at B. Riley Wealth. “But the other piece of the puzzle is that the wealth effect as it pertains to how people feel is always notional, it’s not nominal.”
For instance, most investors tend to just look at their 401k statements — without doing all the calculations to account for inflation — and this year see that their holdings have gone up in value, says Quincy Krosby, chief global strategist for LPL Financial. “You’re not going to do the math,” she said. “They tend to look at ‘do I have a job, did I get a raise.’ There’s a certain psychology about seeing how much you have in your 401k or your bank account.”
“It’s as if Americans are just saying, ‘Yeah, I get it prices are higher, but I’ve got a job, I’m lucky, I can go to Taylor Swift, I can stay there for three days,’” she added. “They’re doing it.”
–With assistance from Isabelle Lee, Emily Graffeo, Michael J Regan and Elena Popina.
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