Housing struggle with supply and mortgage rates.
Market Dichotomy: S&P 493 vs. S&P 7
This year, a notable market dichotomy has unfolded. The S&P 493, essentially the S&P 500 minus seven significant technology stocks, has shown a modest rise of 4%. In contrast, the S&P 7, representing the seven largest companies within the S&P 500, has soared by 52%. This divergence results in the entire S&P 500 being up 13%, demonstrating that a handful of dominant companies are driving the entire market’s gains. Consequently, an investment in the S&P 500 today predominantly represents an investment in these market-leading companies.
Housing Affordability Crisis
Currently, the U.S. faces a housing affordability crisis, with home price to income ratios exceeding 4.5x, surpassing the levels observed during the 2008 financial crisis and paralleling post-WW2 era ratios. The median home price to income ratio typically hovers around 3.2x, indicating an essential disparity in the current market. To rectify this imbalance, either a substantial drop in home values or a significant surge in incomes is imperative.
The Wealth Divide and Fed Policies
The repercussions of the Federal Reserve’s policies are conspicuous, with the top 0.1% amassing wealth at unprecedented rates, witnessing an increase of $5.2 trillion since 2020, bringing their total wealth to $18.6 trillion. These 132,000 households significantly benefit from the Federal Reserve's policies, with the minimum wealth cutoff being $38.2 million as of 2019. In stark contrast, the majority grapples with the impacts of inflation, declining real incomes, and the least affordable housing market in history.
The Fed professes to serve all Americans, but the tangible outcomes of their policies illustrate a contrasting reality, highlighting the Fed’s explicit contribution to escalating wealth inequality. The middle class continually shrinks under this economic strain, whilst the ultra-wealthy minority accrue more wealth, largely unchecked and unaccountable for the escalating disparities.
Fed's Role in Economic Turmoil
Historically, the Federal Reserve, since its inception in 1913, has incited 20 recessions, averaging one every 5 and a half years. Typically, the infusion of cheap money propels inflation, prompting reactive hikes and subsequent market crashes. While some economists optimistically hope for a “soft landing,” centuries of Central Banking experiences signal the improbability of such an outcome.