By Joseph Adinolfi
Why protracted bear markets may be a thing of the past
The U.S. stock market is becoming too big to fail, according to some observers.
In an economy powered to an outsize degree by the spending of the wealthiest Americans, many are starting to wonder if the U.S. stock market is becoming too big to fail.
Bloomberg Intelligence senior ETF strategist Eric Balchunas raised the question in a report published earlier this week, while several popular investing podcasts have also tackled the topic recently.
“Too big to fail” was a phrase popularized during the 2008 financial crisis to refer to the deeply interconnected U.S. banking giants that had become too systemically important to be allowed to go out of business.
“The U.S. government may prove increasingly unwilling to tolerate a prolonged bear market given how central equities have become to Americans’ retirement savings,” Balchunas said in his report, which he shared with MarketWatch.
The new nest egg
There was a time when economists treated a stock-market crash as a healthy, cleansing event for the broader economy.
But these days, many on Wall Street and in Washington increasingly wonder if another bear market might pose too great a risk to economic security.
Not only has a booming stock market enabled Americans to continue to boost their spending and keep pace with inflation over the past few years, but it has also become an important social safety net and a pillar of security for retirees, Balchunas said. Data he cited showed that about 55% of Americans own stocks – a figure that could balloon to 80% by the end of the decade, as “Trump accounts” and other government programs encourage younger Americans to invest.
That puts the U.S. far ahead of other countries, as the chart below shows.
A booming equity market has ushered in a dramatic shift in American wealth since the 2008 financial crisis. Stocks now make up the largest share of household net worth – even more than real estate.
Importantly, while the middle class still relies on the value of their homes as the basis of their nest eggs, the wealthiest Americans’ portfolios are heavily dominated by stocks and stakes in private businesses, Federal Reserve data showed.
Breakdown of Average American Household Wealth by Percentile
Asset/Debt Category 25th-50th 50th-75th 75th-99th Top 1%
Real Estate 152% 103% 62% 23%
Vehicles 30% 9% 4% 1%
Stocks 14% 14% 30% 32%
Cash 14% 7% 6% 2%
Business 2% 4% 9% 41%
Other Assets 2% 3% 4% 5%
Mortgages -93% -36% -14% -3%
Credit Card -4% -1% 0% 0%
Education Loans -12% -2% -1% 0%
Other Debt -5% -1% 0% -1%
Source: Federal Reserve
Research by Moody’s Mark Zandi, as well as other economists, has found that since the COVID-19 pandemic, wealthy Americans are increasingly driving much of the activity in an economy where consumption generates roughly 70% of annual GDP. Meanwhile, lower-income Americans with fewer assets are falling behind, as their spending growth fails to keep pace with inflation. Zandi and others call it a “K-shaped economy.”
“This is the opposite of inflation, because you would disproportionately hurt the highest-income earners if their paper wealth was to become combustible and go up in flames. The real economy would certainly suffer as well,” said Danielle DiMartino Booth, CEO and chief strategist at QI Research, during an appearance on “The Julia La Roche Show.”
Not only does the stock market comprise a greater share of American wealth than ever before, but it has also reached new extremes in terms of heft relative to the broader economy. The so-called Buffett Indicator, named after legendary investor Warren Buffett, takes the total value of the U.S. stock market and compares it to the size of annual GDP.
An analysis from Dow Jones Market Data showed that the ratio recently stood at 2.5 – the highest on record.
Intervention
Now that a majority of Americans own stocks, policymakers may find it hard to sit on the sidelines and not step in if the equity market is teetering, Balchunas said.
The Federal Reserve has dramatically expanded its policy tool kit since the 2008 financial crisis, culminating with the central bank’s decision to facilitate the purchase of credit ETFs via intermediaries during the early days of the COVID-19 pandemic.
Steve Sosnick, chief strategist at Interactive Brokers, said that the Fed has maintained a longstanding focus on protecting the banking system. This is what motivated the central bank to step in after the collapse of Silicon Valley Bank in March 2023. Any benefits to the equity market due to Fed policy maneuvers have been purely ancillary, Sosnick said.
But the more money that pours into the stock market, the more likely that the market goes from being a leading indicator of economic activity to a critical source of stability for the broader financial system, Balchunas said.
Central banks in Japan and China have in the recent past facilitated purchases of domestic stocks via ETFs, Balchunas pointed out. This is one more reason why the Fed might consider taking similar steps, he said.
“The broader stock ownership becomes, the more difficult it may be for the Federal Reserve to distinguish between supporting financial stability and supporting the stock market itself,” Balchunas wrote in the report.
For his part, Eric Wallerstein, chief macro strategist at Clocktower Group and a former Fed staffer, said he is skeptical of the idea that the central bank would move to directly prop up the stock market. That said, it doesn’t necessarily mean Balchunas’s broader premise is off base, Wallerstein noted.
“Is the stock market too big to fail? I think it is,” Wallerstein told MarketWatch. “I think the wealth effect is a large contributor to current spending and saving patterns. Dissaving would not be as strong without the wealth effect, and therefore spending would not be as strong without the wealth effect.”
For years, Fed data have shown that consumers’ disposable spending has risen alongside their wealth, while savings rates have fallen. It’s one of the clearest indicators of how growing wealth has helped boost consumption, Wallerstein said.
But setting the importance of the consumer aside, the U.S. government has another incentive to protect the market. As the U.S. and China race for artificial-intelligence supremacy, cutting-edge technology is increasingly becoming a national-security concern.
Under President Trump, the White House has taken equity stakes in Intel (INTC) and companies involved with rare-earth metals, in an effort to foster domestic industries that are critical for national security.
A recent report in the Financial Times said OpenAI even proposed handing over a 5% stake to the government. According to the report, OpenAI CEO Sam Altman proposed the government taking similar stakes in other large U.S. AI companies in an effort to de-escalate concerns about the technology.
If a wobbling stock market were to threaten companies like OpenAI, Wallerstein said he believes the federal government could ride to the rescue. OpenAI is expected to raise billions of dollars in a public offering. Although according to recent media reports, the company is considering putting off its public markets debut until next year.
“I do think the U.S. government will backstop some of these companies in a dire situation, perhaps in exchange for equity,” Wallerstein said. “There’s a national-security component to these companies succeeding.”
OpenAI didn’t respond to a request for comment from MarketWatch.
Michael DeStefano contributed.
-Joseph Adinolfi
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