The Trump administration is playing a dangerous stockmarket game
Summary
American investors are extremely exposed to a sell-off—and so is the economy
The Trump administration has been extraordinarily blasé about falling stocks. “I can tell you that corrections are healthy, they are normal," said Scott Bessent, America’s treasury secretary on March 16th, in the government’s most recent shrug. The stumble in America’s long stockmarket rally—the S&P 500 index is down by 8% from its all-time high in February—may have been prompted by Donald Trump’s enthusiasm for tariffs, but it has been exacerbated by the perception that the new administration is quite relaxed about the dip, and therefore likely to continue pursuing damaging policies.
Mr Trump’s team is playing with fire. As markets have soared, and tech has made investing ever simpler, Americans have rushed into stocks. At the end of last year households and non-profit organisations held $38trn in shares of listed firms. The value of their holdings has exploded, climbing by 128% over the past six years. All told, such holdings are now worth 1.7 times America’s disposable household income, which is more than twice the historical average and near the highest level on a record that stretches to 1947 (see chart). A prolonged stockmarket slump would have profound implications, both for politics and the economy.
The biggest danger is of a self-reinforcing downwards spiral between markets and the economy. According to a survey by the University of Michigan, in the first two weeks of March American consumer confidence dropped to its lowest in almost two and a half years. This is weighing on stock prices. Meanwhile, through the “wealth effect", falling stock prices themselves weigh on households’ balance-sheets, and therefore on their spending. In 2019 Gabriel Chodorow-Reich of Harvard University, Alp Simsek, then of the Massachusetts Institute of Technology, and Plamen Nenov of BI Norwegian Business School estimated that a dollar of extra wealth raises consumer spending by three cents. Visa, a financial-services firm, suggests that the pass-through has grown dramatically in recent years. Making very different assumptions, it arrives at the extraordinary figure of 24 cents today.
Even using the lower estimate of the wealth effect, the $4.8trn fall in stockmarket value since the S&P’s recent peak would produce billions of dollars in lost consumer spending this year.Unlike with property, which remains the largest asset category held by American households, the price of stocks can be watched, whether in joy or trepidation, on a minute-by-minute basis, with the resulting change in sentiment immediately feeding through to shopping habits. More than 25m Americans now have accounts with Robinhood, one of the most popular trading apps.
Some risk-takers are especially exposed, having overextended themselves as the market soared. Interactive Brokers, a large securities brokerage, has repeatedly noted the growing popularity of margin loans, which investors use to buy shares. At the end of last year its customers had taken out $54bn for such purposes, up by nearly a third from a year earlier. “Their positions have been more assertive, not only by trading stocks on margin, but by putting on aggressive positions in the derivatives," Milan Galik, the firm’s chief executive, has said.
And it is not just the American public’s overall exposure to the stockmarket that matters. The country’s divided electoral landscape has changed who is most affected by a slump, and how investors feel about it. David Zavarelli, a financial planner in Milford, Connecticut, says his left-leaning clients are more concerned about the downturn than right-leaning ones. “It is the first time I have encountered this in my 18 years in the business," he reports.“How clients are reacting is less about how much risk they’re taking and more about who they voted for in the last election," says Brian Schmehil of The Mather Group, a wealth-management firm. Such anecdotes are reflected in consumer-confidence data, which, as well as being down on average, are more starkly split along partisan lines than ever before. Since the election Democrats have become extraordinarily gloomy about the economy, while Republicans remain optimistic.
In the red
Changing voting patterns also alter the distribution of suffering. Americans who bring in less than $50,000 a year are now more likely to be Republican than Democrat. Meanwhile, highly educated, professional voters have in recent years drifted towards the blue side. American stockmarket wealth is concentrated among high-earners: some 87% of stocks and mutual-fund shares are owned by the top 20% of earners, compared with just 57% of property wealth. Whereas a decade or two ago, a stockmarket sell-off would have been most painful for Republicans, today it is Democrats who would be worst hit.
This may help explain the Trump administration’s laid-back posture. A poorer base of voters is less exposed to stockmarket falls, and may be more likely to see them as a price worth paying for, say, achieving a manufacturing renaissance, which Mr Trump claims his tariffs will bring about. The problem is that upsetting richer Americans will have consequences, even if less severe political ones than before. Since the end of 2019, consumption by the richest fifth of Americans has risen by more than 50%, compared with a 20% rise for the rest of the country. Indeed, over the past year the richest fifth have accounted for almost all growth in consumer spending. If they see lots of red when they next check Robinhood, the whole country—Republicans included—could be in for a nasty surprise.
