Is the stock market actually the economy now?

0:01Patrick Coffey:Welcome back to the Barclays Brief podcast. It's the 1st of December and like many households, mine was buzzing this morning as the kids raced downstairs to open their advent calendars. Now here at Barclays, we're very focused on markets into the year end and also thinking about what are the unexplored themes that will drive markets next year. So stick around as this conversation might just change how you think about the stock market next year. Joining me to unpack what's shaping the narrative and what's being overlooked in markets is Alex Altman, head of Barclays Equity Tactical Strategies in our market division.

0:32Patrick Coffey:Alty, great to have you on the show with us today. Thanks for having me, Pat. Good to be here. Great. So in the next 10 minutes, we're going to try and break down the key themes that are driving markets. Clearly, equities have been pretty choppy recently. We've had AI, rate cuts, liquidity all in the spotlight. What's top of mind for you right now? What's driving the market narrative? Well, I think it's still very much those things. I think that the Fed remains front and center. We clearly saw that part of the November wobble can be ascribed to the fact that the Fed had what was perceived as a hawkish pivot at their October meeting.

1:06But then at the same time, we can't dismiss the AI narrative. It is clearly still a massive chunk of the growth driver of the US economy near term in terms of both the physical capex spend, the impact it's having on the path of US equities, the concept of US exceptionalism and foreign investors wanting to put money to work in the AI narrative. And the US market is still the number one capital market to do that. But then there's other themes as well. We have to think about retail and the exposure levels that they've developed to the US equity complex. And then, of course, the threat to that retail exposure, whether it's because of the Fed, whether it's because of other exogenous shocks that they could see in 2026, or indeed just a weakening of the labour market and the impact that that could have in terms of their ability to hold US equities over the next, call it 12 months.

1:52Patrick Coffey:Okay, so you've touched on the AI narrative, and we've talked a lot about that in the podcast over the last couple of months. And you've talked about the Fed. Talk to me about the retail investor, Alty, because I know it's something that you've spent an awful lot of time talking about in 2025. What's happening with the retail investor? What's the evolution there? And what's the path forward? Well, yeah. I mean, they're long, a lot of stock. Here's the summary. But to put some numbers around that. So headline grabbing one is one in two US households own stocks. Headline number two is the percentage of household net worth that's tied to the fate of the stock market is over 30 % now.

2:25That's a record as well. And then headline number three is that the household net worth percentage in stocks is now materially higher than the next largest percentage of household net worth, which is home equity. And the gap, we haven't seen a gap this large since the 1960s. So whichever way you cut it, there's an awful lot of fate of the US consumer is tied to the fate of US equities. And so the old adage of the stock market is not the economy, I think is completely outdated now. Because not just withstanding the numbers I just mentioned, the real time sensitivity is essentially unprecedented.

3:00And what I mean by that is everyone who owns stocks now has a mobile trading platform. So you've created almost a gamification of the stock market too, because people can see their changes in net worth, or at least the net worth exposed to stocks. They see it in real time, right? So I think that has essentially a reflexivity and the ability to alter consumption instantaneously or near instantaneously in a way that previous cycles where we saw large exposure to stocks could not really fully capture.

3:30Patrick Coffey:Amazing. I mean, this is a complete shift in the market, isn't it, in the last five to 10 years. So talking about the retail investor, what data points are you looking at on your screen at the moment, Alty? And, you know, what are you going to be focused on the next few days, few weeks? Sure. So look, we obviously saw a decent amount of froth coming out in November. And a lot of the buzz was that retail were unwinding aggressively and selling down positions. And yes, of course, we saw that clearly in crypto. We still are seeing it in crypto. We also saw it in more junkier and more meme cohorts within the market.

4:00But a lot of this was effectively a leveraged unwind. If you actually look at the underlying data, which we track, it wasn't illustrative that retail were wholesale sellers of the stock market in November, if at all, they were sellers. And that actually, when you look forward to the data in December, it again would be illustrative to sort of show that in general, retail are generally not better for sale in this environment. And of course, I think if anything, people love to use the historic analog saying the retail are always the ones that panic out of stocks at the lows and so on and so forth.

4:34But the past five years have demonstrated pretty clearly through some pretty rough cycles as well in the stock market that retail aren't the ones who panic at all. They actually have been pretty steady dip buyers the whole way. And a lot of that's been tied to the fact that the job market, for the most part, has been pretty resilient. But the point being is that if we're looking forward for a data point where retail would actually become sellers of stocks, then really two things need to happen. Number one is, as mentioned earlier, people still have jobs for the most part. And as long as they've still got jobs, that means that a lot of people will be contributing to 401ks.

5:05But number two is that by some pretty wonky maths, retail are sitting on some of the largest paper profits or realized profits in dollar terms in history in 2025. And consequently, they're all going to receive 1099 tax bills from their brokerage accounts sometime in January. And they're all going to have to pay that money to the IRS in terms of short term capital gains by April. So what you have typically seen over the past five years is a very seasonal, consistent pattern where retail actually are reduced buyers of stock between the middle of February and the end of March to pay this tax bill, basically.

5:38And that is often when you do see a seasonal retail weakness. That's something which I would be a little bit worried about when we get to it next year. But of course, if 2025 has taught us anything is to try and not to try and trade too far in advance, especially when the middle of February is clearly still a couple months away. And we've got plenty of plenty of distance between now and then for other opportunities to be successful.

5:59Patrick Coffey:Interesting. So in short, presumably, if the retail investor is growing as a percentage of the stock market and the importance of the stock market, the volatility you'll see in February through to April, where some of the retail sector sort of sells off, is going to be higher than ever before. Is that fair? Well, again, to your point earlier, it's one of many factors, isn't it? Retail is not the only force in play. We've still got significant buybacks in the market. They're running at over a trillion dollars a year. We've got 401k plans that are constantly buying between$150,$175 billion a quarter of just passive inflows.

6:33Just, again, as long as people have jobs, they'll be contributing to those 401k plans. We've got the Fed discussion, which we've already covered. There are other factors at play in terms of the flow dynamic. Retail aren't the only factor in town. And so, yes, it's a consideration and it was definitely a consideration in February and March last year. But then it obviously got commingled with fiscal concerns and tariffs. So we can't predict everything. But I do think it's an important thing that investors want to put on their calendar for the end of Q1 next year.

6:59Patrick Coffey:And what else do you think investors need to have on their calendar for next year? What are the other overlooked themes going into 2026, Alty? I would say the biggest one is this whole concept of commodity security that's going to happen. or is already happening between the US and China. And the elevator pitch here is that we've got effectively a strategic detente at an economic level between the two largest superpowers. And we know that because obviously we've got a schedule of meetings between President Trump and President Xi. And consequently, during that detente, I think both countries are going to seek to accelerate their economic decoupling.

7:35And in doing so, one of the centre points is the strategic reserves of necessary commodities. Of course, in the US, the rare earth topic has been well discussed, but there's obviously others as well. There's things like copper and cobalt and just all kinds of base and bulk materials that you want as an economy to make sure that you can function in your maximum capacity. And the same for China, but they're slightly different. China has over a billion people to feed, so they need food security. They need energy security because they're structurally short oil. And yes, they've got plenty of renewables being built, but it's not enough.

8:08So both countries are effectively going to embark upon a strategic initiative to secure as much commodities as possible. And the implication is, of course, if commodities do start to rally significantly as a result of this hoarding, so to speak, then we have to think about the inflation and the consumption, as in the impact on personal consumption, of rising commodity prices. And that's something we haven't had to think about really for several years now. And the impact it could have on both the Fed's path and consumer spending patterns could be quite profound and in ways that I don't think the market is really considered.

8:40Patrick Coffey:Can you just sort of unpack what some of those implications might be if we do see a strengthening commodity cycle from here? The first order of implication, of course, would be the impact on inflation and on consumer spending. But I would say the second order impact, and this is not to say in any way getting all doomsday and bearish, actually, for the record, we're still pretty bullish on the stock market here. But we do have to consider the fact that if you go back through modern history, every single economic downturn was preceded by a commodity spike, right? So we're not at a point where we could even classify this latest commodity move as a spike, so to speak, other than maybe in precious metals.

9:14But the point being is that if we did see a broadening out of commodity rallies across base metals and bulks and even oil, then we have to start considering the impact it will have on consumer spending. And we have to start thinking about both an inflationary dynamic and ultimately an economic downturn dynamic as well. So, again, I think we're a long way off from that being a reality today. But it is definitely a second order consideration if we look back through the historic parallels.

9:39Patrick Coffey:And it feels like definitely something we're going to be talking about and you're going to be talking to clients a lot more about in 2026. Ulti, thanks so much for joining us today on the podcast. It's been great to be here. Thanks, Pat. OK, so there's lots to digest from this conversation. Clearly, the retail investor has evolved massively over the last five to 10 years, with record levels of participation in the stock market. But also, as we heard on last week's episode, Zoranitsa talking about critical minerals, and indeed the previous episode with Femos talking about the US dollar and the commodity cycle, the market may not be focusing as much as it should be on commodities.

10:10Patrick Coffey:These will have big impacts on the macro stage, with trade talks between the US and China pending. And that could have an inflationary impact on households and, latterly, the retail investor too. We will add links to the most relevant research in the show notes, so do have a look. And to get notified of the next episode of the Barclays Brief, don't forget to hit like and subscribe wherever you're listening today.