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- Americans’ connection to the stock market might has made equities “too big to fail,” Michael Kantrowitz, strategist at Cornerstone Macro, said in a note.
- The S&P 500 has never been so closely correlated to consumer confidence, and the US market cap-to-GDP ratio sits at record highs.
- A market tumble could place a major drag on economic growth and leave the government with “an enormous bill,” the strategist said.
- Policymakers’ best option may be to keep stock prices on their upward trajectory, Kantrowitz added.
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Americans are more leveraged to the stock market than ever before, and it might make equities “too big to fail,” according to Cornerstone Macro strategist Michael Kantrowitz.
The correlation between the S&P 500 and consumer confidence sits at a record high, as does the US market cap-to-GDP ratio. The Federal Reserve’s benchmark interest rate remains near zero, and government transfers now account for a record 46% of income.
These trends will likely grow further as the pandemic rages on, the strategist said, adding that a market correction would leave the government with “an enormous bill.”
“Today, more than ever, it’s in policymakers’ best interest to keep stock prices from falling!” Kantrowitz added.
Several commentators have knocked bullish investors and called the market’s latest leg-up a repeat of the 1990s tech bubble. Kantrowitz sees inflated price-earnings ratios as fueled by a completely different factor. Where stocks soared in the late 1990s on “crazy-high growth expectations,” today’s valuations are driven by expectations for a prolonged low-rate environment, he said.
If growth slows in the current environment, investors can benefit from new easing, continued leadership from growth stocks, and possibly higher multiples, the strategist added.
Kantrowitz’s call isn’t necessarily that stocks can’t decline. However, “the ‘cost’ of lower equity prices has never been greater,” as Main Street pays a growing share of attention to how the market is behaving, he said. Any policy rollback or aid unwinding can upset markets and, in turn, set the US economic recovery back.
“It seems cheaper and easier for most to just keep the music playing and supporting the stock market, and by extension the economy,” he wrote.
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