The U.S. Economy is Heating Up... Get Long Rich People - yacht sun
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Economists call it the "wealth effect." That's, of course, the theory that says a rising stock market causes gains-flush consumers to go out and spend more money thereby stimulating overall economic growth. The wealthiest of well-heeled Americans, in particular, get a boost.

From there, it becomes a self-reinforcing cycle – risings stocks, leads to more consumption, causing growth to pick up which pushes stocks higher etc. – that makes intuitive sense. And with the S&P 500 up 8% year-to-date it's worth pondering: Will the wealth effect stimulate the U.S. economy this time around?

Is the Wealth Effect Creating Economic Growth?

It may already be happening. The U.S. economy peaked in the first quarter of 2015 at 3.3%, declined to 1.3% by the second quarter of 2016 and has since rebounded to 2.1%, in the first quarter. While this growth might seem subtle or lackluster to some, it's the rate of change that matters for the U.S. economy and the wealth effect's stock market momentum.

So the good news for stock market bulls is U.S. economic growth is accelerating. So the wealth effect might just be working, especially for luxury consumption. Evidence? Check out the chart below which shows the relationship between the S&P 500 and spending on luxury goods. As you can see, the S&P 500 is up +12.8% in the past year and spending on luxury goods is up 6.9%, a very healthy resurgence from last year's lows of 1.2%.

The U.S. Economy is Heating Up... Get Long Rich People - rlgy lux

The Investing Implication: Get Long Rich People

There's one hitch in the theory about the wealth effect. The top 3% of Americans own 54% of the country's aggregate household wealth with the wealthiest 10% owning 84.5% of all financial assets. That means stock market gains disproportionately flow to the richest of the rich.

It's no surprise, therefore, that the top 20% of households account for almost 40% of U.S. consumer spending. So, as U.S. growth heats up and the stock market heads higher...

The implication: Get long rich people!

The U.S. Economy is Heating Up... Get Long Rich People - ath rich

What's Next: Why the Wealth Effect = US Growth

In the Chart of the Day below from today's Early Look, we’ve highlighted a chart that supports one of our third quarter macro themes, “Real Growth Accelerating.” The chart is aptly titled, “the wealth effect remains supportive.”  It highlights accelerating U.S. household wealth as a percentage of disposable personal income versus the U.S. household savings rate. As Hedgeye Director of Research Daryl Jones writes:

"The key takeaway is that on an economy-wide basis, the “wealth effect” is poised to break out above its Q1 2015 peak.  The implication of this is that the savings rate has room to decline 200 – 300 basis points and buoy consumption growth into the end of the cycle.  Since personal consumption is roughly 70% of GDP in the U.S., this is probably a good thing for those of us who remain growth bulls."

The U.S. Economy is Heating Up... Get Long Rich People - 07.10.17 EL Chart

Bottom Line

Get long the U.S. economy and get long rich people.

(Click here for specific Investing Ideas around this trend.)