Wall Street traders this week were hit by the biggest cross-asset losses since the Federal Reserve’s monetary-tightening campaign peaked in 2023. Blame tariffs, softening growth, a potentially revitalized Europe, and more.
Blindsided bulls are now hoping for a fast rebound — yet so should anyone on Main Street with a stake in financial markets, America’s great wealth-creating machine.
Known as the “wealth effect,” people tend to spend when assets are buoyant — and do the opposite when they’re stressed out. While the scale of the losses isn’t cause for panic just yet, the speed of the plunge is a reminder that markets themselves have the power to cause economic trouble should they continue to crater.
“The wealth effect is a double-edged sword,” said Doug Ramsey, chief investment officer at Leuthold Group. “We doubt this economic expansion can survive a stock market correction of more than 12-15%.”
While S&P 500 edged up Friday and has yet to reach this worrisome threshold — down 6% from its giddy peak — months of market peace have abruptly blown up in a matter of days. Volatility has surged in equities, corporate bonds, currencies, and more.
That is stirring questions on whether stress on Wall Street will sow discomfort among asset-owning consumers. And it’s the latest wild card in an economy whose outlook is already clouded by unknowable outcomes around tariffs and government firings.
In today’s top-heavy business cycle where the richest 10% American households make up almost half the country’s consumer spending, the threat posed by shrinking market wealth is a real one, according to Mark Zandi, chief economist at Moody’s Analytics.
He estimates that for every $1 decrease in net worth, consumer spending ultimately declines by two cents.
That’s a dispiriting figure, given $3.7 trillion was erased from stocks in the last few weeks, just as consumer spending is slowing and data from housing to the labor market has shown signs of weakness.
“The wealth is owned by folks that are older,” Zandi said. “They are very sensitive to their stock portfolio because they’re not working, they don’t have other income. So they are really focused on their wealth, and if the stock market declines and their wealth is diminished, they’re going to respond to that.”
This week saw the volley of confusing tariff-related announcements taken to a whole new disruptive level, causing a plunge in market sentiment and a Wall Street backlash.
Fed Chair Jerome Powell said Friday that officials don’t need to rush to adjust policy amid increased uncertainty in the economic outlook, even as bond traders have boosted their wagers on rate cuts.
Stocks posted their worst week of 2025 by far, with the Nasdaq Composite Index briefly entering a 10% correction. With major ETFs tracking stocks, Treasuries and corporate bonds falling an average 2%, the market endured the worst across-asset selloff since October 2023.
The equity plunge is particularly unsettling. The rise in U.S. total net worth since 2022 has been almost entirely driven by their stock holdings as technology shares led the equity boom amid frenzy over artificial intelligence.
Excluding that factor, net worth by American households would have been broadly flat over the period, according to data compiled by Kaixian Tan, an analyst at Gavekal Research. A falling stock market may force Americans to save more when housing remains highly unaffordable, he warns.
“I’m not too worried about the current growth,” Tan said. “I am, however, worried about the overvaluation of U.S. equities and the potential for ‘better stories’ outside of the U.S. leading to a simultaneous fall in U.S. equities and U.S. dollar. If this happens, this may eventually lead to a growth slowdown.”
(Credit: Shutterstock)
Copyright 2025 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.