Can a stock rout take the US economy down with it?
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The stark shift from economic optimism is creating an unsettling reality for traders trying to figure out where US markets go from here.
PHOTO: AFP
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NEW YORK – It has never been easier for everyday Americans to trade stocks. And, for the past two years, that has largely meant one thing: making money.
On platforms from Fidelity to Robinhood to Coinbase, almost everything seemed to come up green in 2023 and 2024. The S&P 500 gained more than 20 per cent in both years and favourites of retail investors, such as Nvidia (plus 819 per cent), Tesla (plus 228 per cent) and Bitcoin (plus 467 per cent), surged along with any number of ultra-leveraged funds.
But the recent US$5 trillion (S$6.7 trillion) US stock plunge, coming as President Donald Trump’s chaotic trade war
The stark shift from economic optimism is creating an unsettling reality for traders trying to figure out where US markets go from here. One major question: At a time when it is easier than ever for people to see fluctuations in their day-to-day net worth, can a stock rout take the US economy down with it?
The question is especially pressing given it is high-income Americans – those who own stocks but are not entirely immune to a market swoon – who have been powering consumer spending in recent years.
“The wealth effect was helping consumers dramatically,” said Mr Steve Sosnick, chief strategist at Interactive Brokers. “People who were in a position to invest in the market saw the gains and that was influencing their spending and their mood.”
It is a commonly held notion that Main Street and Wall Street are different places; that the rise and fall of stocks do not drive the broader economy. But the number of investors who have the values of their investments at the tip of their fingers has ballooned in the past few years, especially after legions of retail traders entered the market during the Covid-19 pandemic when there was not much else to do.
Total accounts at Interactive Brokers Group more than tripled from the end of 2020 to the end of 2024, for example, and active brokerage accounts at Charles Schwab Corp jumped 23 per cent during the same time. Fidelity Investments saw total retail accounts climb from 31.5 million at the end of 2023 to 36 million at the end of 2024 – an increase of more than 14 per cent.
As demand for trading swells – and assets like crypto provide a round-the-clock means of doing so – some of the most iconic US stock exchanges have made moves to boost their offerings. Nasdaq last week became the latest venue to announce plans to offer 24-hour trading on its equities exchange, following similar proposals by Cboe Global Markets and the New York Stock Exchange.
The people who own stocks tend to be wealthier, and it is those Americans who have buoyed the economy and corporate earnings in recent years. By and large, they kept up purchases of cars, vacations, Taylor Swift concert tickets and restaurant meals even as inflation and high interest rates hammered lower-income households.
Now, as stock prices tumble, some are pulling back.
Mr Max Littman, a 26-year-old health tech consultant in Santa Barbara, California, said he used to have about 30 per cent of his money in cash but started putting more into stocks after the Federal Reserve cut interest rates in September and he began earning less on his high-yield savings account.
Now, his wealth is tied up in broad market exchange-traded funds. Mr Littman said he tries to resist the urge to check his portfolio constantly, but even a glance a day is enough to know that the money he and his girlfriend are saving for a down payment is evaporating. They are also postponing vacation plans and skipping restaurants.
“Everything is super expensive and the market is in the toilet,” he said. “It feels like I missed the good time to sell.”
At SGH Wealth Management, founder Sam Huszczo said he is “just starting to get the first wave of people getting concerned”. He said he met a woman earlier this week who has put more than half of her portfolio in Nvidia stock.
“She’s like a deer in the headlights,” Mr Huszczo said.
In the post-pandemic economy, spending by middle- and high-income households has fuelled the strong demand for retail goods and propped up consumer resilience, according to an October report from the Fed. Meanwhile, lower-income households pulled back on spending from mid-2021 to mid-2023, especially after the extra savings they built up during the initial shutdown were depleted.
Still, throughout that stretch, Americans broadly benefited from a strong labour market. But some are now turning more gloomy about job prospects too. A monthly survey from the New York Fed released this week showed the highest odds since September 2023 that the unemployment rate would be higher one year from now, with the increase broad-based across age, education and income groups.
Mr Armand Domalewski, a 35-year-old data analyst in San Francisco, is among those who have turned pessimistic.
He said his savings are parked in index funds and is concerned that he will be forced to sell into a down market. Or, worse, that if the sell-off continues, he may lose his job.
As a result, he is delaying a trip to Japan this summer, cutting back on subscriptions, cooking more at home and postponing elective surgery on his foot.
“We have to be cautious,” he said.
Retirees who maintained equity-heavy portfolios, and did not diversify or put aside money for shorter-term needs in more stable investments, are in a particularly tough spot. If they are forced to sell stocks at lower valuations during a long downturn, those locked-in losses raise the risk that they could run out of money faster than expected in retirement.
“The most vulnerable period in times of market volatility is what I call the red zone – the two to five years before retirement and the two to five years after someone retires,” said Mr Rob Williams, managing director of financial planning at Charles Schwab.
The wave of selling in recent weeks has been broad – hitting tech’s high-fliers and consumer-facing companies alike. Among those facing the largest losses are the very companies that amateur investors have been pitching at holiday gatherings and across online forums like Stocktwits and Discord.
Tesla, Super Micro Computer and Palantir Technologies have wiped out more than a quarter of their value in the 14 trading sessions since the market peaked, with their losses more than tripling the decline of the S&P 500. Over that stretch, a basket of 15 companies and exchange-traded funds that have been retail trader favourites is down 18 per cent, almost double the benchmark’s 9.3 per cent drop. BLOOMBERG
