Why the Stock Market Drives the Economy - Not the Other Way Around
Since its 1977 inception, the Federal Reserve has operated under the mandates to maximize employment, curb inflation, and moderate long-term interest rates. Since the days of the Greenspan put, one can add stabilizing the U.S. stock market to its modus operandi . I would argue that the original mandates have taken a backseat to stock market stabilization. Why? The stock market is the tail that wags the dog due to its effect on U.S. consumption. Here’s what I mean: When breaking down the components of GDP in the U.S., 68% is personal consumption, 17% business investment, 17% government spending, and -3% net exports. According to a 2018 study entitled “Stock Market Returns and Consumption,” the lower 50 th percentile of households in terms of wealth distribution consume 33% of every dollar made in capital gains, demonstrating clearly that rises in capital gains acquired through stocks influences consumer spending. The inverse wealth effect works too on a surprisingly short-term