Stock Market Gains Help the Rich. Consumer Sentiment Could Still Worsen.

When markets rally, the wealthy may feel more confident in their ability to keep spending.


Brandon Bell/Getty Images

July was a great month for stocks, and many have seen further increases in August. That could bode well for many wealthy Americans, who hold the majority of the nation’s financial assets, and their purchasing power. Yet it may be premature to correlate recent market gains with future hope for consumer spending.  

Friday will bring the preliminary reading of August’s consumer sentiment, as tracked by the University of Michigan. This year has brought month after month of historic lows, but that survey notched an increase to 51.1 last month, an unexpected bounce after June’s downbeat record.

Although projections call for another drop, to 51, some may hope that that it could hold flat or even that the upward trend could continue, helped by the recent market rally.

After an abysmal first half of the year, July marked an abrupt turnaround: The Dow Jones Industrial Average and the S&P 500 saw their biggest one month point and percentage gain last month since November 2020, and the Nasdaq Composite notched its best point and percentage change since April 2020.

It was the Dow’s best July since 2010, the S&P 500’s best July since 1939, and the Nasdaq’s best July ever. That trend has largely continued in August. While the Dow is in the red this month, the S&P 500 is up 1.9% through Wednesday’s close, and the Nasdaq entered bull market territory, rising 3.8% month to date.

That’s important because the one-fifth of American households at the top of the income spectrum own nearly three-quarters of financial assets. They also account for two-fifths of consumer spending. The upshot is that when markets rally, this segment feels the biggest impact to their wealth, and thus may feel more confident in their ability to keep spending. The fact that inflation wasn’t as bad as experts expected in July could also provide a key mood boost.

Given that consumer spending is a major engine of the U.S. economy—accounting for more than two-thirds of gross domestic product—improved sentiment among the wealthiest Americans could help the nation avoid some of the more bearish scenarios investors fear.

However the main caveat may come from the rally itself, which exploded so quickly and ran so high.

“That’s the last thing you want to see in a bear market; you want to see it go sideways for a while or grind slowly higher,” because the risk is that a big bear market rally just sets up stocks for another fall, says Bill Smead, Chief Investment Officer of Smead Capital Management.

That’s because while the inflation reading this week came in better than expected, there are still plenty of hurdles left to navigate, including next week’s earnings results from big retailers



Walmart

(WMT) and



Target

(TGT), which have warned they’re seeing consumers pull back in discretionary categories. Even if those reports are better than expected, it may be hard for the market to rally even higher after its big moves.

“Given an ongoing slowdown in the economy and earnings risk, our view remains that the S&P 500’s near-term upside potential is likely capped in roughly the 4200-4300 range,” notes Truist Advisory Services Co-Chief Investment Officer Keith Lerner. The S&P closed above 4,200 on Wednesday and is rising again today.

Of course, wealthy Americans also have more savings, which can help them keep spending even in tougher times. There’s also the fact that gas prices have been falling, including below $4 for the first time in months, which could bolster lower income Americans’ spending power and general mood.

Yet ultimately policy makers and investors will want more than just a month or two of positive readings to feel more upbeat about consumers’ health and the overall economy.

Or in the words of CFRA’s Chief Investment Strategist Sam Stovall, “one thing is certain: August should live up to its reputation for being among the most volatile months in stock market returns.”

Write to Teresa Rivas at teresa.rivas@barrons.com