> they are taking money out of the 401k, out of their life savings, at the same time their purchasing power is decreasing
Withdrawing from a 401(k) has no real effect. Spending the proceeds does. The decrease in purchasing power blunts the restrictive effects of those savings being spent with no corresponding contemporaneous production.
> a prolonged slump is coming
Careful. America is uniquely tuned to benefit from migration. The present trend is professional money managers, afraid to admit the Fed is paying more than they’ve performed, continuously forecasting an imminent recession (and presumed rate cuts).
First, selling stocks puts downward pressure on price and also p/e ratio. A lower p/e ratio means startups and growth companies trade at lower multiples.
Second, selling bonds increase yields, which means the price of borrowing (interest rates) goes up. When that happens, companies that borrow money (most of them) see lower profits because more money is spent on interest than on investment (machinery, people, etc).
Capital markets are complicated beasts, but withdrawing capital has very predictable effects - we just don't know if the effect will happen slowly or quickly (like in a panic).
One other effect that happens is that as people retire (or get close to retirement), their investment choices become more conservative and there tends to be a shift from smaller, more volatile growth companies to larger, more established companies with good dividends. That shift alone is worth a thesis or two.
As for your last comment, I can't tell from the wording whether you agree or disagree with the PP's comment. However, I would note that since the baby boomer generation is larger than the Gen Z now entering the workforce, that on average, experienced people are retiring at a higher rate than the rate that young inexperienced people are joining the workforce. This tends to result in higher labor cost (fewer people to fill jobs), which, when combined with higher interest rates tends to mean lower growth for a good period of time (measured in years, not months). Obviously there is variability from month to month and quarter to quarter, but the trend is clear (or will be soon to everyone). It's not the 1970's, but some of the parallels will be surprising.
> selling stocks puts downward pressure on price and also p/e ratio…selling bonds increase yields
These are financial effects. It takes extra steps to get to a real effect, unlike spending. (Financial effects are monetarily mediated, which means the Fed can do things.)
> lower growth for a good period of time
Agreed. That’s different from “a prolonged slump” [1][2].
Wouldn’t withdrawing from your 401k and transferring it to a checking account limit the pool of funds available for equity investment and move it into lower risk assets?
The money in your checking account is still available for lending. Most every dollar on deposit with a "bank" remains available for that bank to use/leverage/loan. Money isn't really parked until you stash it as cash under your mattress.
> Wouldn’t withdrawing from your 401k and transferring it to a checking account limit the pool of funds available for equity investment and move it into lower risk assets
Yes, at the margins. But these are still financial effects. When a capital project is delayed because the bank they hired to sell stock came back with a lower price after talking to the retiree’s asset manager, that’s a real effect.
Withdrawing from a 401(k) has no real effect. Spending the proceeds does. The decrease in purchasing power blunts the restrictive effects of those savings being spent with no corresponding contemporaneous production.
> a prolonged slump is coming
Careful. America is uniquely tuned to benefit from migration. The present trend is professional money managers, afraid to admit the Fed is paying more than they’ve performed, continuously forecasting an imminent recession (and presumed rate cuts).