The stock market just hit another record high; so did your grocery bill. That’s the K-shaped economy in one sentence. One American is getting richer, while the other can’t keep up with rent. Peter and Jeff dig into who’s actually winning, why the gap keeps widening and what it means for your paycheck, your portfolio and your plans. Stick around for their tips of the month.
Hosted by Creative Planning’s Director of Financial Planning, Jeff Stolper, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
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Transcript:
Jeff Stolper: I’m Jeff Stolper, Director of Financial Planning at Creative Planning. With me is Peter Mallouk, president of the firm, and we are Down the Middle.
Inflation, the price of oil, central banks making interest rate decisions, big tech earnings, there’s a lot going on. An undercurrent to some of those headlines is the K-shaped recovery with people who are wealthy at one end and people who are struggling at the other. Peter, tell us a little bit more about what that K-shape means.
Peter Mallouk: Yeah, there’s been a lot of headlines around this and I think it’s getting more and more traction as people are becoming more and more aware of it, but let’s just start with the basics. So most of the time when there’s a recession or a bear market, often they go together where the economy’s weaker, unemployment goes up, and at the same time the stock market goes down because the stock market says, “Hey, if these things are happening, future earnings will probably be lower. So we should adjust stock prices lower.” Usually when we have a bear market, when there’s a recovery, everything tends to recover together pretty rapidly. That’s called a V-shaped recovery. Things go down fast, they recover fast.
Every now and then you have a recovery that’s very slow. The market goes down, the economy goes down, and it stays pretty low for a long period of time. L-shaped recovery is how that’s referenced. You’ve got the dead count bounce recovery where you get a quick recovery only to go back down and recover again. People call that the W recovery.
But we really, in my lifetime, I don’t know there’s ever been a K-shaped recovery. And a K-shaped recovery is when you see part of the economy recover and the other part of the economy struggle. And that’s what we’re seeing today. And this is so hard for people to reconcile when they’re watching the news or on social media or hearing people talk about how great it is or how bad it is. It’s like, how are all these people living in the same world? And this has really been created primarily, artificially by the government.
So basically when we had COVID and we had this decline of the economy that was obviously very rapid, we had the quickest 34% drop in market history. Of course, unemployment was through the roof because companies were letting off employees because they had no customers and didn’t have any end in sight. And the government response to this was an economic attack. Interest rates came down a lot, right? So that made it lower cost to buy a home and a washing machine and a car and so on because the monthly payments were lower. But really the dropping of money into every household was over the top. Whether it was a corporate bailout or the forgivable loans for private businesses where people that are running a private business, the government basically came in and gave them money for a period of time and said, “Hey, we’re going to forgive all this money we’ve given to you.”
This dropped millions of dollars. There were real businesses that needed this like restaurants, for example, but there were a lot of businesses that didn’t need this at all. In fact, they were still collecting revenue and they were taking these forgivable loans. There were wealth management firms, RIAs that were taking these forgivable loans, which I think is terrible because they’re still getting their quarterly fees or still managing their clients’ money. They’re doing it from home into their office, but they were able to pocket these millions of dollars. And then you had a lot of the population get stimulus checks in the mail. So you have interest rates dropped a lot, Americans of all stripes getting money handed to them by the government. And then we find out, okay, everyone’s not going to die and people start to calm down and go back to work and then there’s a vaccine and all of that. So we wind up in this world where everyone’s right back where they were a few months prior, but with a bunch of money and interest rates really low. What happens when that happens is people buy stuff and the companies that make that stuff see their stock prices soar. It’s very inflationary to have all this money in the system.
Compounding that, Biden and Trump have teamed up on one thing that they do in common, which is spend more than they collect. Right now, we are spending about a trillion dollars more than the government takes in every five months. Imagine you had a credit card, American credit card, and every five months you spend a trillion dollars just dropped in the economy. Of course, prices would go up. So all of these things together have driven up asset prices. Okay, great news if you’re an asset owner. If you own a house, if you own rental properties, if you own stocks, or if you own a business, or you’re a shareholder in a business, or you own private equity, all of those things, you’re an owner.
Those assets have soared. Creative planning clients have done great. People that have shares in their company have done great and so on. That’s the part of the recovery that’s gone straight up. If you are like most Americans and you don’t have a lot of equity in your home or you don’t own a home at all, you’re not a shareholder in a business, you don’t own private equity, you don’t have a lot of money in the stock market. What happened is all your costs of everything, going to Disney World, flying on a Southwest flight, buying a candy bar, buying a box of cornflakes, going to McDonald’s, all of those costs have soared and your income has barely soared to keep up with it. So you are feeling the pain. You’re working a $25 an hour job and you’re in LA and it’s $20 to have lunch or $25 to have lunch. How’s this going to work?
So you have part of the population that’s struggling. That’s the K that’s going down and you have part that’s doing better than ever. That’s the K that’s going up. And there are lots of examples of that. This is what’s happening right now.
Jeff: Yeah. One aside real quick, there is one other thing that maybe Trump and Biden have aligned on and I think that’s space exploration. I think that there are also many presidents that are aligned there. What you’ve mentioned being an owner, you’ve mentioned those that are struggling. Those are the two distinct populations that we’ve got, but do you think that’s overly simplistic? Do you think maybe there’s a middle group there, more of like a, I don’t know, you talked of all the letters, a diagonal E recovery or something like that?
Peter: Some people are talking about the E recovery, that there’s this middle group. But yeah, of course it’s overly simplistic. It’s not divided specifically into those two categories. The middle class is doing just fine through all this because the middle class, you do have some equity in your home, you have a 401k, maybe that’s all you have, but it’s enough to stay out of inflation, so it works out okay. If you look at the evidence of what’s out there now, like we see airlines, you’ve got airline carriers building more luxury cabins and premium seating now than they ever have before. And at the same time, the main cabin has vacancies. This is like an upside-down world, bizarro world where you’re selling out the premium seating and you can’t fill up the rest of the cabin. Look at what’s happening in the food industry, high-end restaurants, reservations a month in advance in most major cities now. It’s like the demand is overwhelming and you see high-end steakhouses opening everywhere.
At the same time, Chipotle, Cava, McDonald’s, all on their quarterly earnings calls talking about how their consumer is really struggling to afford their meal because the Chipotle bowl has all these ingredients that have soared in price. They’ve got to pass those prices on to the consumer. A lot of consumers are going, “You know what? I just can’t do this. I can’t do this.” So you have high-end restaurants doing great, the rest aren’t doing great. 50% of the economy is just from 10% of the population. I mean, this is the highest it has ever been. I mean, you see it just everywhere. I mean, one of the places I know that a lot of my clients talk about is you can’t get into a luxury hotel in a lot of major cities now on weekends, but no problem going to the economy hotel.
Another great example of this overwhelming demand of this new group of people who are asset owners who have done very, very well. And so I think it’s just, yes, there’s a middle ground. Yes, there are people that are doing okay through this, but the gap between the top and the bottom has never been more pronounced than it is right now.
Jeff: Wait, say that one more time. So it’s 50% of the economy is made up by 10% of the population. That’s a crazy, crazy number. I mean, really hard to fathom, but if you think about all the luxury goods that are out there, all of this stuff that is being bought by that upper class, that’s a wild thing to think through.
What does it mean to employment? I mean, when you think about all of the people on the two legs of your K, what does it mean to that group?
Peter: It’s really interesting to watch the data around this right now because what we’re seeing is if you have a job, it seems to be, so far, really secure. But for the first time in a long, long, long time, we are seeing new grads or people that don’t have current jobs struggling to reenter the market. And this seems to be a warning sign, not related to the K-shaped recovery, but related to AI. And the companies are going, “Well, maybe I’m not going to go hire those 10 extra people because what I’ve seen so far is I think I’m going to get a solution from artificial intelligence that’s going to be able to make it where I don’t need those 10 extra people.”
And frankly, we see that here at Creative Planning, right? We have, I think it’s 80 to 100 job postings right now, but there would be more. But we are looking at certain areas, and I know Jeff, you’re involved with me in this where we’re going, look, we think AI is going to be able to do these things in the future. We have a long history of never laying off anybody for economic reasons ever, including during COVID. I’m very proud of the fact that we were the only wealth management firm I’m aware of to publicly say, no matter how long this goes on, we’re not letting go of one person over this. And I would like to have the rest of my career be that way. And so you really look ahead and go, “Maybe we don’t need to hire 10 people for this. Maybe we should hire four because maybe AI will be able to pick up the difference in the future.”
This is the warning sign, I think, of what is coming. And it will be interesting when you lay in higher unemployment to the K-shaped recovery, and I’m afraid that might be what’s coming.
Jeff: Yeah, I agree. And you mean warning sign in terms of what’s coming for AI, correct?
Peter: That’s right. That’s right.
Jeff: Yeah. Okay. Well, Peter, let’s move into our tip of the month. What do you have for us?
Peter: All right. We all just paid our taxes. If you had to put more in, you’re probably pretty upset. If you got money back, you’re probably excited. The reality is you don’t want to be putting more in or taking some out. You can’t get this perfect. Taxes are so complicated. You’re almost always going to be putting more money in or taking some out, but this is the time to look and say, “Hey, how do I get my withholding as close to accurate as possible so that when I get to the end of the year, I’m not getting a big refund.” A big refund means you’ve let the government use your money for a little while. We don’t want that. And if you have to pay too much in, you can wind up being penalized, having interest and so on. And so, this is a good time to be talking with your CPA, make sure you’ve got your withholding optimized.
How about you, Jeff?
Jeff: As a CPA, that could be a whole ‘nother topic for us, but I don’t think anyone would listen to that podcast. It would be boring. So my tip of the month, before the Tax Cuts and Jobs Act, before 2017, about 30% of people itemized on their taxes. So things like their charitable contributions, medical expenses, taxes, things like that. Well, there was recent legislation in 2025 that increased what is called the SALT limit. That stands for the State and Local Income Tax Limit. Previously, you were only allowed to deduct $10,000, now you’re allowed to deduct $40,000, and it creates an opportunity for many, many people who are now going to itemize, previously didn’t.
So over the coming years, this is available for the next couple of years. I would recommend doing what’s called bunching your deductions. Could be setting up a donor-advised fund and contributing a large sum to that. Maybe you have some kind of elective medical procedure that you could time out. A lot of opportunity, you could pay your property taxes early, a lot of chances to make the most of that. And then further, I was talking with the head of our tax department, Ben. He brought up one other one. Even if you aren’t going to itemize, it’s very beneficial right now to still keep track of your charitable contributions. You can deduct $1,000 or $2,000 dependent upon your filing status, even if you don’t itemize. So still keep track of that stuff periodically throughout the year, much easier to do now than all at once in April of 2027.
Peter: Good advice.
Jeff: I’m Jeff Stolper, director of financial planning at Creative Planning. With me has been Peter Mallouk, president of the firm, and we are Down the Middle.
Disclosure: This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.
