“Excess” cash was not particularly important for many Americans. That means that the liquidation of that cash probably did not play (much) of a role in financing consumer spending over the past two years. And that in turn probably means that consumer spending will not suddenly slow down now that the “excess” cash balances outside of the top 1% have mostly disappeared. For better or worse, wage income has been the main driver of aggregate consumer spending throughout this period. Relatively low levels of debt—including among those who have relatively less cash on hand—means that many Americans have a lot of latent financial firepower to increase their spending above and beyond their income, should they wish to do so. That may not be attractive now, but lower interest rates could potentially change things. Zooming out, it is worth noting that the liquidation of household cash balances has coincided with surging investment in U.S. Treasury securities (potentially hedge fund activity, but that is a subject for another note) alongside slower borrowing and sustained purchases of other assets, both real and financial.
- Date Posted:
- January 2, 2024
We found that roughly 50% of the most expensive stocks (those in the top quartile) remained in the top quartile one year later. Roughly 30% dropped into the next quartile, while roughly 10% fell to the second-cheapest quartile and the cheapest quartile respectively. Since these companies have the highest valuations for the current fundamentals, we can think of this most expensive quartile as a proxy for the most “growth-y” companies. The picture overall looks slightly different for the lowest quartile of value, which represents the cheapest stocks. On average, 75% of the cheapest quartile of companies in the US remain in the cheapest quartile one year later, while 17% graduate to the second quartile, and 5% and 3% move to the third and fourth quartile respectively. Within the cheapest quartile, we find evidence that valuation multiples tend to mean revert, albeit gradually.