Stocks In Correction Territory

The recent stock market correction is more than just a reaction to economic uncertainties—it could actively contribute to an economic slowdown. While investors initially cheered President Trump’s election, market sentiment has shifted dramatically due to concerns over an aggressive and unpredictable tariff war.

  • On Thursday, the S&P 500 fell more than 10% from its February high, officially entering a correction. Though it regained some ground on Friday, the overall market sentiment remains fragile.
  • The Harvard economist Gabriel Chodorow-Reich estimates that, all else being equal, a 20% drop in stocks in 2025 could reduce economic growth by as much as one percentage point this year. As of Friday’s close, the S&P 500 was down 4.1% for 2025.

“In a hyperfinancialized economy like America’s, asset prices can lead the economy, not just the other way around,” said Alex Chartres of Ruffer, a British fund manager. A decline in asset markets could weaken real economic conditions by reducing consumer confidence and corporate investment.

The Wealth Effect and Spending Patterns

The stock market surge of 53% over 2023 and 2024 both reflected and fueled economic strength. Rising stock and home prices gave wealthy Americans extra capital, enabling increased spending. The top 10% of earners now account for roughly 50% of all consumer spending, up from 36% three decades ago, according to Moody’s.

  • As of 2022, families in the top 10% of income held an average of $2.1 million in stocks, representing 32% of their net worth, up from 26% in 2010. Over the past four years, this group increased spending by 58%.
  • It’s not just the wealthy who are stock-market dependent. Investment firms Vanguard and Fidelity report record participation in 401(k) plans among wage earners.
  • By the end of last year, 43% of American households’ financial assets were in stocks—the highest proportion ever, according to Federal Reserve data.
  • Given these statistics, a severe market downturn could trigger widespread spending cutbacks. This phenomenon, known as the wealth effect, suggests that when stock prices fall, consumers feel less wealthy and reduce discretionary spending—on everything from vacations to clothing.

According to Deutsche Bank economists, if the stock market had merely held steady last year instead of rallying, consumer spending growth would have been 2% instead of 3%, demonstrating how much the market’s performance fuels economic activity.

Trade Wars and Economic Uncertainty

President Trump’s erratic trade policies and rapid policy shifts have deepened economic concerns among Americans. With declining 401(k) balances and rising inflation expectations, consumers are paring back on discretionary spending, including vacations and home-improvement projects.

  • The University of Michigan’s consumer sentiment index fell 11% in mid-March, dropping to 57.9 from 64.7 the previous month.
  • Sentiment among Democrats reached its lowest level on record, including during the 2008-09 financial crisis. Even Republicans, while more optimistic about long-term gains, are feeling the strain.

As noted by analysts, President Trump recently declined to rule out a recession, further fueling uncertainty.

Consumer Spending and Economic Impact

Bleak economic sentiment can become self-fulfilling. Nervous consumers tend to cut back on spending, slowing down economic growth. While economists have lowered their growth estimates, they still expect the economy to expand.

Rebecca Patterson, an economist and senior fellow at the Council on Foreign Relations, has noted that, “The consumer drives the U.S. economy. Where the consumer goes, the economy goes.”

  • Recent data reflect this pullback. Consumer spending in January saw its largest monthly drop in four years, though some of it may be weather-related.
  • Bank of America reported that customers spent 2% more on their credit and debit cards in the seven days ending March 8 compared to a year earlier. However, spending on airlines dropped 7.1%, and home-improvement expenditures fell 2.7%.

“Consumers cut back first on the nice-to-haves and big-ticket items,” Patterson observed. “Within the must-haves like food, they might switch to lower-cost brands.” However, spending reductions might be modest since the job market remains strong, and many consumers are still benefiting from higher home values.

Businesses Sound the Alarm

Companies across sectors—from casual wear to luxury goods, liquor, and household staples—are warning of a slowdown in consumer demand.

  • Delta Air Lines and American Airlines have cut their first-quarter guidance. On Tuesday, Delta CEO Ed Bastian remarked, “There is something going on with economic sentiment, something going on with consumer confidence.”
  • Budget-conscious shoppers are showing stress behaviors, according to Walmart CEO Doug McMillon, who noted during a Feb. 27 presentation at the Economic Club of Chicago, “You can see that the money runs out before the month is gone.”

As financial uncertainty grows, consumer behavior will continue to be a key leading indicator of economic health in the months ahead.

Disclaimer

Please note that Benchmark does not produce investment advice in any form. Our articles are not research reports and are not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

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