'Soft landing' means top 1% gets record stock prices while you get stuck with inflation, analyst says

The U.S. stock market has returned to all-time highs, but that doesn’t mean Americans are better off financially, according to Sven Henrich, market analyst and founder of Northman Trader.

In a recent thread on X (formerly Twitter), Henrich said gains in the stock market don’t benefit Americans equally. You can thank the Fed for that, he implied.

“Soft landing means the top 1% gets record stock prices while you get stuck with the most unaffordable housing market ever, permanent price increases & record credit card debt,” he said. “But you get to keep your job and have to work longer to pay it all off.”

The term “soft landing” refers to the Fed’s coordinated cooling of the economy through higher interest rates, with the goal of reducing inflation. Even by the Fed’s own admission, the central bank is willing to sacrifice job growth in pursuit of this mandate.

As the Fed’s interest rate policy punished job seekers, first-time homebuyers, and credit card holders, investors enjoyed record stock prices—with the S&P 500 and Dow recently setting records for the first time in two years.

As the Institute for Policy Studies (IPS) shows, the top 1% benefits disproportionately from gains in the stock market. The think-tank recently reported that the wealthiest 1% of Americans own 54% of public stocks, up from 40% in 2002.

“The U.S. stock market is where major wealth gains have been achieved,” wrote Chuck Collins, a director with the IPS.

And while more Americans own stocks today, the idea of a “democratized stock market” is largely a myth because wealth is still largely concentrated at the top, he said.

One of the main reasons why the rich get richer is that those who own assets actually benefit from inflation—unlike the average American, who gets footed the bill.

Not all inflation is the same

One of the main reasons why the rich get richer and the poor gets poorer is that—unlike the average American—those who own assets actually benefit from inflation.

That's because inflation isn't about rising prices of goods and services. Inflation also pushes up asset prices, also known as "asset inflation."

In fact, investors who own real estate, stocks, and other assets have seen their wealth soar since the pandemic. That’s largely a product of asset price inflation, as more dollars chase fewer goods.

“[S]ince the top 10% hold nearly 90% of the assets, they benefit the most from all this related asset price inflation,” Henrich wrote in May 2023.

“Indeed, the skew is so large, with the top 1% benefitting the most, the end result is ever-widening wealth inequality. Central banks drive this,” he said.

But now that the Fed stopped printing money, shouldn’t stocks decline as a result? Not necessarily.

While stocks crashed in 2022 as the Fed cranked up rates, they more than recouped all the losses in 2023. Part of the reason is the economy outperformed last year, which had a positive impact on the earnings of major companies.

According to Rob Haworth, senior investment strategy at U.S. Bank Wealth Management, it’s not just present rates that affect stock markets—expectations also play a big role.

“Present value calculations of future earnings for stocks are tied to assumptions about interest rates or inflation. If investors anticipate higher rates in the future, it reduces the present value of future earnings for stocks,” he said.

The opposite is true if investors anticipate rates will decline in the future.

That’s exactly what investors are calling for this year. As Creditnews recently reported, Wall Street’s largest asset managers expect rate cuts of anywhere between 100 points to 225 points in 2024 as the Fed looks to avoid recession.

Inflation has a “cumulative effect”

Policymakers at the Fed have cheered progress on inflation. After all, the consumer price index has fallen from a peak of 9.1% in June 2022 to 3.4% in December 2023.

But the numbers can be deceiving.

“The current environment is tough,” said Ted Rossman, senior industry analyst at Bankrate. “Although inflation has eased, there’s a cumulative effect there.”

While prices aren’t growing 9.1% year-over-year, Americans are still living with the cumulative price increases since the start of Covid.

In practice, Americans “shouldn't expect prices on goods and services to return to pre-Covid levels,” said Andy Baxley, a senior financial planner at The Planning Center, a Chicago-based financial advisory.

“Consumers waiting for prices to come down before making a big purchase may be disappointed,” he said.