Lower-Income Americans Increasingly Worried About the Economy Despite a steadily growing economy and low unemployment easing some of the pain of high inflation, middle- and low-income Americans are feeling more stress. Recent evidence includes a drop in the consumer sentiment index in June to a seven-month low, primarily due to rising anxiety among middle- and lower-income Americans. This widening gap in economic perception is not surprising. Wealthier households have larger financial cushions and benefit from a surging stock market that boosts their wealth. In contrast, lower-income Americans have largely depleted their pandemic-era savings and must now rely on their job earnings to keep up with rising prices. Persistent high inflation and interest rates are straining their budgets, leading to increased credit card usage and more loan defaults. One positive development is the significant income growth in recent years. A tight labor market has forced businesses to pay more, and job switchers have received substantial raises. A recent Congressional Budget Office (CBO) report found that incomes have slightly outpaced inflation since 2019. As a result, most families spend a smaller portion of their income on essentials. However, these benefits are unevenly distributed. The highest earners spent 6.3% less of their income on goods and services in 2023 than in 2019, while the lowest earners spent only 2% less. This disparity explains why the wealthy are less worried about inflation. Moreover, lower-income households face higher price increases for their typical purchases compared to wealthier people, and their wages have not risen as quickly. What does the growing lack of confidence among many Americans mean for the economy? Nationwide financial market economist Oren Klachin noted that middle- and lower-income people spend most of their earnings on consumer goods and services. If they reduce spending, it could disrupt the economy. “This will be an important dynamic to watch in the second half of this year,” he said.

The S&P 500 has set 29 new records in 2024, peaking again on Thursday. However, lower futures on Friday suggest it may not reach 30 records in this session. Optimism about potential interest rate cuts and excitement over AI have driven this bull run. However, caution is advised. The Nasdaq 100’s 14-day relative strength index has surged to 77.5, surpassing the overbought threshold of 70. Additionally, the market is increasingly reliant on a small number of big-cap stocks, which are significantly more expensive than their small-cap counterparts. Doug Kass, founder of Seabreeze Partners Management, lists several concerns. He believes corporate profit expectations are “unrealistic” and notes that stocks are overvalued relative to Treasury yields. Kass also points to underestimated political risks, overly bullish investor sentiment, and potentially toxic market structures and investor positioning. Ian Culley, investment analyst at All Star Charts, highlights recent market volatility as evidence of ongoing instability. He suggests monitoring high-yield bonds for insights into investor sentiment. According to Culley, the performance of the iShares iBoxx $ High Yield Corporate Bond ETF compared to the Invesco S&P 500 High Beta ETF and the Invesco S&P 500 Low Volatility ETF provides a clear indication of risk appetite. “When investors feel comfortable buying high-risk bonds, riskier stocks with a higher beta outperform safer alternatives,” Culley explains. He adds that a breakout of the HYG above 78 would confirm a risk-on stock market rally.