Markets are hot, consumers are spending — but that doesn’t mean everyone is winning. Here’s the K-shape story.
KEY TAKEAWAYS
The US recovery has taken a K-shaped trajectory: some segments thriving, others falling behind
Top income/asset households have seen the bulk of the gains (wealth effect, stock ownership, rising home values)
Lower-income workers, renters, non-degree-holders face stagnant or declining homeownership and labor outcomes
Visible signs of strength (luxury spending, crowded malls) mask deep structural divergence in the economy
For investors and policy watchers, the question is who is growing–not merely that growth exists
MY HOT TAKES
This K-shape is the default now, not an anomaly–structural forces (automation, globalization, education gaps) made it inevitable
The asset inflation narrative (stocks, real estate) has decoupled from the wage/salary reality for many households–that’s a major risk
Policymakers are behind the curve: they see broad aggregates and miss that the benefit is concentrated
For markets, bullish signals can persist while the lower arm cramps, however, when fatigue sets in among the majority, the upward arm may face pressure
I’m cautiously bullish on sectors tied to the upper arm (tech, asset-rich companies) but perpetually uneasy about the broader economy and blind spots in aggregate data
You can quote me: “The recovery is real–just not for the majority.”
K is for… I was out window shopping for a new espresso machine this weekend with my wife. My longtime followers know that she very graciously wakes up every morning when most of the country is still in deep REM sleep and proofreads my morning missives. Even the best of us makes silly mistakes this early in the morning, and believe me, she has saved me from some really embarrassing ones.😉 That said, my wife has become a highly knowledgeable font of financial, capital markets, and economics information. She has become an accidental expert! Those superpowers allow her to see things from the perspective of my 35+ years of experience –WHICH I SHARE WITH YOU EVERY DAY. I had to make sure that you understood all that before I got on with my story.
I happened to be in an upscale mall–only a few still exist–which was literally packed to the gills with folks lining up to spend money. If you read my note and watch my videos, you know that I am pretty cautious, making sure that you are always well-aware of the risks lurking in the shadows. I am–at least at the moment–unmistakably bullish on some areas of the markets, while being simultaneously nervous about the economy, and dubious about the Fed’s focus on inflation, the flavor of which it cannot even control. It’s like riding the wave cautiously. That said, my wife looked over at me as we passed the many long, appointment-only lines of consumers queued up in front of luxury brand stores and said “this does not look like a struggling economy!” Now, that is not the first time she brought that up. You can’t get a reservation for months at New York’s pricier restaurants–even if you are lucky… and friends with industry insiders. Apartment rents are so high that they can cause one to laugh out loud spontaneously–partially out of disbelief and partially out of panic. How can average people afford this? Is this even sustainable? Does this story end like a scene in one of those End of Days paintings hanging in the Met?
Before you lambast me as an elitist, I am well-aware that what I think of as “average people” is not really an accurate depiction of “average people.” In fact, if you are reading this or watching the video, you too–though you may think so–may not be an “average people.” In the period before and during the pandemic, many economists were opining on what might be a “U-shaped” or a “V-shaped” recovery. Remember that? Of course, you do, but you might not recall discussions about a “K-shaped” recovery. It was out there, but it didn’t get too much airtime, because where most of us sit, it felt very much like a “V-shaped” recovery. 🚀Onward and upward, right? Maybe, not so much.
First of all, let’s define a “K-shaped” economic recovery. A K-shaped recovery happens when the economy rebounds unevenly after a downturn–some parts recover and even thrive while others keep falling behind. Picture the letter “K”: the upper arm represents industries, companies, or people whose fortunes rise (like tech firms, asset owners, or high-income workers), while the lower arm shows those still struggling (like small businesses, lower-wage workers, or sectors tied to consumer spending). Instead of a shared recovery, it’s a split one–growth at the top and stagnation at the bottom. Yesterday I brought up the high price of beef to make a point, and it really is high compared to just a few years ago. Same with chicken and even pork. For this discussion, it’s not about why those prices are high, it’s about the fact that it is, and you have to wonder how the real “average people” are making ends meet. I certainly feel inflation’s effects on my budget, so it must really be painful for those who earn less. What might be going on with the lower arm of the “K?”
The first clue that the recovery has been K-shaped comes from the GINI Index, which measures inequality across the income spectrum. The higher the number, the more uneven the distribution of wealth. What’s important about this indicator is that it tells us whether income gains are being shared broadly or concentrated at the top. Before the pandemic, the U.S. GINI index had already been trending higher, but what stands out is how sharply it spiked post-2020. That spike reveals that while some households saw their incomes recover, and even surge, many others did not. The divergence wasn’t a blip. It became the defining feature of the so-called recovery. The line shot upward, like the upper arm of the letter K, while the lower arm–the working class–remained flat. You could call it one of the most unequal “recoveries” in modern history, but the data says it all: the recovery was real only if you were sitting near the top.
That widening split is also visible in household balance sheets. The Federal Reserve’s data on investment ownership shows that the wealth effect–an economic term for how rising asset values make people feel and spend richer–has been almost exclusively captured by the top 20 percent of income earners. The top one percent alone now controls nearly half of all U.S. stock and mutual fund wealth. That is not hyperbole, my friends, it’s fact. As the green bands in the chart climb higher, the story practically tells itself: the rich got richer. The lower 60 percent, by contrast, are barely visible–those thin blue and red layers at the bottom that haven’t grown meaningfully in fifteen years. For anyone who wonders why Wall Street feels buoyant while Main Street feels brittle, there’s your answer–IN ONE SINGLE CHART. Asset inflation lifted portfolios, not paychecks.
You can see the same split in the labor market. The unemployment rate by educational attainment is one of the clearest examples of how opportunity now tracks education, and by extension, income, more tightly than ever. Those with a bachelor’s degree or higher have unemployment hovering around 2.7%, while those without a high school diploma are stuck at roughly 6.7%. That’s not just a gap, it’s a chasm. The implication is that labor market recoveries are no longer rising tides. Instead, they lift one set of boats and swamp another. Every major downturn in recent decades has reinforced that divide, but this time it feels starker because the top half of the workforce also gained flexibility, remote work, and digital leverage, which are luxuries unavailable to those who punch clocks or rely on hourly wages. Education has become the ultimate risk hedge.
Homeownership tells another side of the story, and it’s a painful one. Among the lowest-income households–the bottom 20%, the share of homeowners has fallen in recent years. After peaking near 48% around 2020, it’s been sliding steadily lower. That may not sound catastrophic, but in a country where home equity represents the largest source of household wealth, losing access to ownership means losing access to long-term wealth creation. Rising mortgage rates and home prices have simply priced many out of the market. For millions, the “American Dream” now looks more like… well, just a dream, far from a reality.
Contrast that with households in the 61st to 70th income percentile, where homeownership has actually increased, particularly over the past few years. As lower-income buyers were squeezed out, higher-income buyers, often with stock market windfalls and easier access to credit, have stepped in. It’s another K-shape within the larger K. One line falls, the other rises, and between them sits the middle class, increasingly hollowed out. Homeownership used to be the great equalizer but now it’s the great differentiator.
Put it all together–the income inequality, the wealth concentration, the education-driven labor gap, and the split in homeownership–and you have the anatomy of a K-shaped economy. From the street level, it’s easy to miss because the upper arm of the K is very visible. You see crowded restaurants, booked-solid luxury retailers, and vacation photos flooding social media. Those are real signals of confidence and spending, but they’re also coming from a smaller and wealthier segment of the population. The lower arm is quieter, less visible. It’s the families scaling back grocery lists, skipping car maintenance, or relying on credit cards to bridge monthly gaps. It’s the retail worker whose rent rose 15% while wages barely moved, or the young professional locked out of homeownership despite doing “everything right.”
This divergence matters because it distorts how we interpret the economy. When the S&P 500 rallies and unemployment sits below 4%, it’s tempting to call that a healthy recovery. But if the gains are concentrated and the vulnerabilities widespread, that recovery is brittle. Policymakers, investors, and ordinary citizens feel it differently depending on which arm of the K they’re on. For the upper tier, higher asset prices create a buffer. For everyone else, higher prices for essentials like housing, food, and healthcare, erode real income and savings faster than any wage gains can offset.
What’s particularly interesting is how this dynamic feeds back into markets. The very inequality that defines the K-shaped recovery reinforces bullish momentum in financial assets. Those who already own stocks, property, or businesses see their wealth expand, which in turn supports more investment and spending at the top. That’s the wealth effect again. But because consumption patterns differ by income, the macro data can appear strong even when large parts of the population are struggling. It’s a paradox that confuses policymakers and investors alike, and one that leaves the Fed chasing headline numbers that mask underlying fragility.
If you zoom out, the K-shape is not new. It’s the culmination of decades of structural forces: automation replacing routine labor, globalization rewarding capital over wages, and education becoming the key to mobility. The pandemic simply accelerated it. Stimulus checks and asset inflation temporarily lifted both arms, but once the short-term aid faded, gravity pulled the lower arm back down. The post-COVID economy became a mirror of its inequalities: AI investments surged, high-end consumer demand exploded, and low-wage sectors stagnated.
Now, as we debate rate cuts and the next phase of fiscal stimulus, the question isn’t whether the economy is growing–IT IS–but who it’s growing for. Investors see record highs! But many households see record strain. That’s why it’s dangerous to make investment decisions based purely on personal experience. If you’re fortunate enough to be in the rising arm of the K, your world looks strong, resilient, and profitable. But that’s not the full picture. The real economy, where spending, employment, and opportunity interact, is far more uneven. And when the gap between perception and reality grows too wide, markets eventually notice.
So, before you assume that a packed mall or a bustling restaurant means the economy is firing on all cylinders, take a step back. Look at the data. The handwriting is on the wall… or, more accurately, on the charts. The K-shaped recovery is not a theory; it’s an observable fact. The top is rising, the bottom is stalling, and the middle is shrinking.
I still haven’t bought that espresso machine yet as I am still recovering from sticker shock. Maybe that’s my own personal contribution to the lower arm of the K. But it’s a reminder that our individual experiences don’t define the economy. No, they are just data points within it. Step back, look broadly, and you’ll see what’s really happening: two very different recoveries unfolding at the same time.
YESTERDAY’S MARKETS
Stocks had another mixed close with the Dow closing at another record and above a “magical” round number 48,000. Optimism over the ending of the government shutdown provided headwinds to equities. 10-year yields slipped by 4 basis points but remain above 4%.
NEXT UP
The government is open, but it's not likely that we will get weekly claims or CPI data, which was scheduled for today. 😕
Fed speakers today: Daly, Kashkari, Musalem, and Hammack.
Important earnings today: Disney, Applied materials, and StubHub.