Caitlin's Corner

The Economy Feels Broken. The Market Disagrees.

Last month during our Free Wealth Wednesdays session on the 2026 market outlook, without intending to, Susan and I kept repeating the same thing (almost annoyingly, but we couldn't not say it):

We are living in a K-shaped economy.

If you’ve found yourself thinking:

• “Everyone I know feels squeezed.”
• “Groceries, housing, insurance are all relentless.”
• “Why does the stock market keep rising?”
• “Why are spending reports still strong?”

You’re not imagining the contradiction. This, my friends, is the K-shaped economy.

What Is a K-Shaped Economy?

Picture the letter K.

The stem of the K represents a major shock in the economy, such as what we experienced throughout 2020. Following that, instead of everyone recovering together, outcomes diverge:

• One group moves upward (top-reaching arm in the letter "K", or the blue line on the right side of the graph above).
• Another group moves downward (bottom-reaching leg of the letter "K", or the orange line on the right side of the graph above).

While the graph above shows how the K shape plays out among different recovering industries, the same divergence applies to individuals and households. That divergence creates two completely different lived experiences at the same time.

Some households see:

• Rising investment portfolios
• Home equity growth
• Stable or growing income
• Expanding business profits

Others see:

• Wage pressure
• Persistent inflation strain
• Higher debt balances
• Fragile job security

Both realities are true, and that’s why headlines feel disconnected from your daily life.

It's important to remember:

1. The stock market is not the economy.
2. Consumer spending is not evenly distributed.
3. Growth is not evenly shared.

When asset prices rise, households who own assets benefit disproportionately. When inflation rises, households that spend most of their income on necessities feel it first and hardest.

Those are the upward and downward arms of the K.

Also Emerging: The “E-Shaped” Economy

You may have heard about another version of this framework, which is the E-shaped economy.

Think of three horizontal tiers:

• The top bar is the high-income earners and asset owners doing well.
• The middle bar represents those who are getting by, but not advancing.
• The bottom bar is the people who are losing ground.

The E-shaped economy has the same underlying message: economic outcomes are no longer moving together, which is why the data feels so confusing.

Strong corporate earnings can and do coexist with rising credit card delinquencies. Market highs can and do coexist with financial anxiety. Healthy (though with slowing growth) GDP numbers can and do coexist with household stress.

The "E" shows us how three very different stories are happening simultaneously.

Should We Be Worried?

I would say that whether we're talking about a K or an E shape in our economy, it doesn't look great. No matter where you sit on such a letter, you're depending on an economy with rising wealth disparities, and history teaches us that this sort of disparity frequently results in long-term negative effects on social mobility and economic stability. We also know that concentrated gains equate to concentrated risks.

So- should this make us worried? Since worry is not a strategy- no, we should not be worried. But, we should be planning. For one thing, if you're in a position where you can build assets (you have plenty of emergency savings, and have high-yield debt paid off), then continuing to build assets by investing gives you a huge advantage. If you own assets, if your income is stable or growing, if your portfolio has benefited from market strength- you're already in, or moving toward the upward arm of the K.

If your current savings rate is minimal, but you have room to cut your spending- now is a great time to do it. If you haven't adopted financial tracking, going into an uncertain economy can be even more stressful. Here's a quick guideline on what I mean by that. If you're wondering how or why you might trim your lifestyle, I've written about that, too.

If you're not in the upward arm of the K, do whatever you can to build assets, and avoid new debt at all costs. I'm optimistic that this growing disparity will lead to more economic policy reform, ultimately helping to get us to more linear growth in the future.

What a K-Shaped Economy Rewards (and Punishes)

K-shaped environments tend to reward:

• Asset ownership
• Long-term investing
• Strategic tax planning
• Liquidity and optionality
• Multiple income streams

They tend to punish:

• High consumer debt
• Lack of emergency reserves
• Overdependence on one income source
• Financial passivity

During our last Wealth Wednesdays session, we emphasized positioning rather than predicting.

You don’t need to forecast the next recession, or time the market. You need:

• A long-term wealth plan.
• A clear asset allocation aligned with your goals (and with plenty of diversification).
• Liquidity for opportunity.
• The discipline to stay invested through noise.

The shape of our economy right now is not proof that things are about to go south; instead, it's a likely sign of social and financial volatility to come. For context, almost exactly a year ago I wrote about what to do in times of high volatility. We've been seeing patterns like this for a while, and the message is the same: don't panic, do plan.

What I'm (Watching)

🎥 I think this short does a great job of summarizing our K-shaped reality.

Join us for free the first Wednesday of each month for an informative money conversation!

Next Up:

Mar. 4, 1pm Central - 2026 Real Estate Market Outlook​

After covering the 2026 Stock Market Outlook, we're taking a look at the real estate market now, and in the year ahead. Luckily, we don't have crystal ball envy; we'll instead look at what real market indicators are telling us, and what that might mean in terms of buying or selling decisions and beyond. This is a great opportunity to get an objective view of what's happening and ask questions you have about real estate in general, or how some of this data relates to your situation!

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