The good times on Wall Street may have reached a tipping point. Thanks to the nine-year Bull Run, the ratio of net wealth from stocks and financial assets compared to disposable income is now greater than ever. According to Federal Reserve data, total net worth in the U.S. is now at $98.75 trillion, nearly seven times the total of $14.55 trillion in disposable income.
Texas Economist Ray Perryman explains why that large net worth-to-income disparity is a possible recipe for trouble. "Instead of home values and hard assets going up, it's just sort of paper wealth that's going up," he tells KTRH. "Then, if that starts to go down then people could start retrenching on their spending very quickly and generate a recession." Indeed, the last two times the ratio of net worth to income was this large, in 2000 and 2006, a recession followed within two years.
The Fed is doing its part to cool off the surge in stocks with targeted interest rate increases. The latest was announced this week, the sixth rate hike since December 2015. And the Fed projects at least two more rate hikes this year. But Perryman warns that too many rate hikes too fast could spook investors and only trigger a faster sell-off. "It's just a warning that (the Fed) could be in kind of a delicate situation here in that, things you're trying to do to help in one direction may actually cause a counter result in the other direction," he says.
Ultimately, Perryman recommends the Fed continue a modest pace of rate hikes similar to what it has done so far. "An orderly increase two or three times a year of a quarter of a point," he says. "As long as the economy is on a pretty good track, I think that is the kind of thing they need to be doing."