(Bloomberg) — Stocks survived the Jackson Hole conference to rebound this week. But for the bulls looking to bounce back from last year’s bombing, the road back is longer than they realize.
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Stocks rose for the first time in four weeks, with the S&P 500 now recovering nearly 65% from last year’s bear market decline. However, the inflation factor makes the retracement smaller – only about 45%, adjusted for the CPI. Plotting the value of the S&P 500 against nominal GDP shows a similarly small recovery relative to the size of the economy, according to data compiled by Doug Ramsey at Leuthold Group.
In short, thanks to weak purchasing power, the $8 trillion advance in equities is not what it used to be. With debates raging about the impact on consumers of rising borrowing costs and rapidly draining savings, the deflated dollar’s depreciation in the stock market has implications for everything from the health of the economy to the future of Federal Reserve policy.
“The stock market has recovered a large share of its losses, but thanks to the inflation built up since the market peaked in early 2022, real wealth is not as great as one might think,” said Ramsey, the company’s chief investment officer. “You may be disappointed at what your recent gains in the stock market can buy you.”
The S&P 500 had its best week since July as traders scrutinized a slew of central bank rhetoric on Friday. Stocks, especially the tech giants, have rebounded as investors look to the end of a cycle of interest rate hikes by the Federal Reserve, and hype around artificial intelligence has helped boost prospects for companies with ties to the industry.
Curiosities about how much wealth is being created tend to emerge the higher the market, as it has for most of this year. The market is not the economy, but it can be seen as a leading indicator as a rebound in stocks tends to be followed by a rebound in the business cycle. Advances in stocks can increase consumer confidence, as those who own stocks feel rich, if only on paper.
With stocks rallying this year – along with consistently stronger-than-expected economic data – calls for a recession have been dismissed. While some economists had predicted that the US would enter a period of contraction sometime this year, many now see it posting better numbers – and a smaller rise in the unemployment rate – in the second half of the year.
The focus has shifted to the case of the American consumer, whose cash reserves accumulated during the pandemic are rapidly dwindling. And in the past two years, in the face of soaring inflation, they have withdrawn about $2 trillion of those savings.
Federal Reserve Chairman Jerome Powell & Co. We have made progress in cooling inflation, however the readings are still above target. Prices are still growing, albeit at a slower rate, and families continue to face high costs for things like groceries. Powell said on Friday that price hikes in the economy “remain very high” while warning that the central bank is ready to raise interest rates further to bring them down to 2%.
In other words, selling stocks after a rally won’t “finance” the same house, car or amount of groceries as happened in late 2021, Leuthold’s Ramsey said. “If you think you’re going to take the winnings and bring them back to your second home, you might be disappointed,” he said.
There is one group that could have a silver lining: the Fed. Some officials recently assumed that their efforts to tighten fiscal conditions might be “more important than expected”.
“The implication that this would leave for the Fed, in my opinion, is that we don’t really live in an irrationally impulsive market, so that’s good news,” said Art Hogan, chief market strategist at B. Riley Wealth. “But the other part of the puzzle is that the influence of wealth in terms of how people feel is always hypothetical, not nominal.”
For example, most investors tend to just look at their 401k statements — without doing all the math for inflation — and see this year that their holdings have gone up in value, says Quincy Crosby, chief global strategist at LPL Financial. She said, “You won’t do the math.” “They tend to look at the question: Do I have a job, did I get a raise?” There is a certain psychology involved in knowing how much is in your 401k or bank account.
She added, “It’s as if Americans are just saying, ‘Yeah, I understand the prices are higher, but I have a job, and I’m lucky. I can go to Taylor Swift, and I can stay there for three days.'” added. “They do.”
–With assistance from Isabelle Lee, Emily Grafio, Michael J. Regan, and Elena Bobina.
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