- Fixed Income Portfolio Manager
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“There is a mysterious cycle in human events. To some generations much is given. Of other generations much is expected.”
— Franklin D. Roosevelt
While it may seem strange to discuss the economic implications of an equity market sell-off amid the ebullience of the current moment, the uneven US generational wealth distribution is an underappreciated risk worth exploring. By 20 June, the S&P 500 had touched 31 all-time highs this year alone, making 2024 the best start to any election year on record. As robust as the market has been, however, I believe if asset prices were to fall substantially, the ramifications for the US economy would be broader than many believe.
Let’s start with a look at the overall stock of US wealth. At the end of the first quarter, the ratio of US household net worth to GDP was 570%, close to its highest level in 70 years and surpassed only during the heady days of 2021, marked by meme coins and ZIRP, or zero interest-rate policy (Figure 1). For decades prior to the global financial crisis (GFC), a strong inverse relationship existed between household net worth and savings rates, the logic being that the wealthier someone is, the less they need to save their income. Warren Buffett, for example, with a net worth of over US$125 billion, does not need to save a penny of his US$100,000 Berkshire Hathaway salary.
Figure 1
After the GFC, however, this relationship broke down, even though household net worth returned to pre-GFC levels within seven years. Why? Despite the relatively quick stock market recovery, housing prices would not return to their pre-GFC levels for another 11 years. Housing tends to be a larger share of net worth for the middle class than for the richest Americans. So, with their most valuable asset underwater, the US middle class began to save a larger share of their income than was typical, historically speaking.
Fast forward to 2021 and the dramatic post-COVID economic turnaround, the correlation between high levels of net worth and low savings rates has recurred. This relationship has lent support to the argument that even if asset prices dip by 10% or more, US households would still enjoy pre-COVID levels of wealth; therefore, we should not expect consumption to collapse or the savings rate to spike. I’m not so sure.
Effects of uneven generational wealth
I believe the distribution of wealth matters more than the stock of wealth, and right now net worth is concentrated in the Baby Boom generation (people born between 1946 and 1964). As of year-end, Baby Boomers held 52% of US wealth, compared to 26% for Gen X (1965 – 1980) and 9% for Millennials (1981 – 1996).1 Because most Boomers are nearing or in retirement, the recent surges in both home prices and the stock market have disproportionately benefited their generation and underpinned consumer spending.
People who become wealthy in their 30s or 40s tend to increase their savings, since they plan to live for many more years and often need to save for big future expenses like college and retirement. In contrast, older people who accumulate wealth can consume more aggressively because retirement is largely funded, and remaining lifespans are shorter. Today, Baby Boomers are the largest generational consumer segment in the US. This atypical tilt has led to reflexivity between higher net worth and consumption. Amid the rising stock market, older Americans have been consuming aggressively, elevating corporate profits and justifying equities’ elevated valuations — at least for the time being.
Reflexivity also works in reverse. If asset prices were to fall, then Boomers would likely consume far less and the savings rate could rise, delivering a more substantial blow to the economy than is presently assumed. Boomers’ asset allocation preferences, marked by heavy exposure to stocks over bonds, are also unusual. Historically, retirees have preferred bonds given their need for stable income. The stellar performance of US stocks throughout most of their prime working years,2 however, has conditioned many Boomers to deploy their savings in stocks despite the high levels of income they can currently generate with bonds.
Taken together, I believe that if the stock market were to decline, Boomers might reallocate massive amounts of capital to bonds in short order, driving yields sharply lower. This eventuality could also break the recent positive correlation between stock and bond prices. For the past few years, markets have been frustrated by bonds’ inability to effectively hedge stock market drawdowns. This could change given the higher starting point for bond yields and the ongoing income needs of Baby Boomers, many of whom have decades more to live.
Finally, I would note that another reason bonds have underperformed is the conundrum of who will finance excessive US deficits as the rest of the world pulls back from buying Treasuries. The Baby Boom generation’s substantial wealth could be reallocated to make up for this shortfall, but that would only happen, in my view, if stock prices were to fall simultaneously — thus forcing this reallocation. Perhaps this is a problem for tomorrow, but the economic and market implications from the generational wealth divide are already profound.
1“Wealth distribution in the United States from the first quarter of 1990 to the fourth quarter of 2023, by generation,” Statistica, 11 April 2024. | 2From 1990 to the end of 1Q24, the S&P 500 generated 10.77% annualized returns, more than double the 5.05% return for the Bloomberg US Aggregate bond index.
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