AI-Summary – News For Tomorrow
US households’ stock ownership reached a record 45% of financial assets in Q2, mirroring levels preceding the dot-com crash. This surge raises concerns about the impact of a potential market downturn on personal finances, especially with a fragile labor market and persistent inflation. High stock ownership, both domestically and by foreign investors, historically increases downturn risks and lowers returns. The “K-shaped economy” further exacerbates the issue, where stock market gains disproportionately benefit the wealthy, masking economic struggles of lower-income Americans and creating economic instability dependent on affluent spending. A market slump could significantly curtail their spending.
News summary provided by Gemini AI.
New York
—
Direct and indirect stock holdings, including in mutual funds or retirement plans, accounted for an all-time high of 45% of households’ financial assets in the second quarter, according to Federal Reserve data.
The record-high stock ownership raises red flags about whether a market downturn could hit Americans’ personal finances — especially in an economy with an increasingly fragile labor market and stubborn inflation.
But it’s not all upside.
Notably, Americans’ stock ownership has surpassed that of the late 1990s, just before dot-com bubble burst, said John Higgins, chief markets economist at the consultancy Capital Economics.
“That should ring alarm bells, even if the buoyant stock market keeps rising for a while amid enthusiasm for AI,” Higgins said in a note to clients.
It’s not just American households that are holding record levels of stocks. Foreign investors’ share of US stocks also hit a record high in the second quarter, according to Fed data.
History shows that when levels of stock ownership are at record highs, the risk of a downturn and the potential for below-average returns increases, according to Rob Anderson, US sector strategist at Ned Davis Research.
Stocks and the economy
While the S&P 500 floats near record highs, concerns are also mounting about the emergence of a “K-shaped economy,” in which the richest Americans get even richer while the poorest Americans continue to struggle or get even poorer.
That’s in part because the job market, where most Americans make the bulk of their money, is stagnating, while the stock market, which is how wealthy people tend to make their money, is surging.
That is creating distortions in economic data, too, helping to paint a rosier overall picture than the one many Americans are feeling in their lives. The buoyant stock market is propping up the net worth of the wealthy, fueling their own spending, which in turn has helped propel economic growth, Roach at LPL Financial said.
But underneath the hood, the economy is on shakier grounds: Lower-income Americans are increasingly strained, and if there is a market slump, it could spook the wealthy Americans who have been propping up the economy with their spending.
Gordon said while the market’s gains can spur consumer spending, the opposite can be true when the market tumbles.
