My prediction: within the upper trend of the K-shaped economy there is another K lurking and a major market correction will reveal it.
Consumer spending is still high, buoyed mostly by the upper class. I think within the upper class there are roughly three sub groups: high income earners, medium-high net worth, and high and above net worth.
High and above net worth are what we typically think of as rich people. They have $30M+ of diversified assets.
The high income earners are doctors, lawyers, regional sales director of Acme Corp. But they still are W-2 employees and actually pay more taxes than their high net worth neighbors.
The medium-high net worth are small business owners, landlords, white collar professionals who had great stock options in the 2010s and diversified it in the 2020s.
The high net worth eats out a lot, pays someone to do all their household chores, drive a luxury SUV, pay for club sports and private tutors, and dress nicely. These individuals own all or part of jet and have a condo in Vail they try and spend at least two months at a year.
The high income and med-high net worth spend almost the same amount of money. They eat out a lot, pay someone to do all their household chores, drive a luxury SUV, pay for club sports and private tutors, and dress nicely. Just like the high net worth individual. They fly first class to a rented luxury condo in Vail.
If the market makes a big correction the guy who was worth $50M, now worth $30M, still has that house in Vail and the jet to get there. Maybe now he just rents it out those months it was sitting idle.
Let’s say the high income earner was making household income of $750k, $250k was in bonuses. Trying to keep up with Mr. & Mrs. Highnetworth was costing them $550k lifestyle. Well when the overall market takes a hit, they don’t lose their jobs but they do lose their bonuses. Now that lifestyle feels squeezed. Similarly, the small business owner with net worth of $5-10M now sees a drop in demand for their good. Knowing that the market will come back in a few years, they take lower distributions, keeping more money in the business avoiding huge layoffs. Ms. Small Bizowner now has less discretionary spending.
So in the upper end of the K we get another K that forms, where those with high net worth keep spending and those with med-high net worth and high income get cautious and spend less on discretionary spending. The volume, though is in the high income and the med-high net worth. As a result, if you sell a luxury product accessible to the Doctor/Lawyer power couple you are going to see a reduction in sales.
