Wealth in Stocks, Not Real Estate Key to Consumer Spending

Equity markets have a far greater impact on consumer spending than housing wealth, according to a new report from Citigroup Capital Markets.

Strategist Tobias Levkovich said:

For those willing to think that home values and related equity extraction was the driver for consumer behavior in the 2000s, we would respectfully disagree.

Based on his calculations, Mr. Levkovich said consumer spending would have climbed far into the double digits for several quarters had Americans used up all of their home equity and income, thus bringing the savings rates to zero.

But this never happened, according to the strategist. In fact, he said the cumulative difference between nominal consumer spending and nominal individual income for the years in which home prices soared is roughly $2.685 trillion from 2002 through 2007. In other words, that's money not spent.

The strategist wrote:

The idea that all spending was driven by home equity extraction is interesting and sensational but not rooted in the data. Investors are entitled to their opinions but the numbers simply do not add up to support the 'home equity withdrawal as the driver' allegation.

Equity markets, meanwhile, do appear to influence retail sales. In particular, as equities improve, higher end consumer stocks tend to outperform their lower income end consumer stock peers while 'Thriving & Thrifty' does better when markets slump, Mr. Levkovich said.

He pointed to the fact that the top 20% of American income earners account for about 40% of US consumer activity.

As a result, this group carries dramatically more economic influence. Since the top 20% of income earners are estimated to own more than 90% of stocks, the relationship between stock prices and willingness to spend is actually quite reasonable.

From the second quarter of 2007 through the first quarter of this year, household net worth dropped by $14-trillion, with $9.8-trillion of that likely due to securities portfolios, according to the U.S. Federal Reserve's Flow of Funds report.

Since the end of the first quarter, Mr. Levkovich said more than $3.5-trillion of those losses have been recouped by the stock and corporate bond markets’ recovery, meaning greater wealth may begin to cut into some of the rebound in the savings rate.

He said:

While it is fair to suggest that Americans may want to have a savings rate after the past three years of not having such, the call for savings rates to go into double digits, as was the case in the late 1970s and early 1980s, seems suspect to us since the attraction of yields is not as compelling now as it was then, when parking cash in a certificate of deposit could garner 17% annual returns.

Comments

[friar tuck:]

finally someone hits the nail on the head. there is some gross un fairness for us little guy stock traders with the pre and aftermarket trades. last week i owned 350 shares of BEAT. i went to bed monday or tuesday night with a small profit and happy with my cost basis. i wake up, turn on my etrade and see the stock has already lost over 4 dollars before i could even make a trade. finally had to settle for a loss of over 2 thousand when i was able to sell at 8 am. what's up with that crap??? doesn't the market want us little guys to play too??? let's all get real here and face the fact that the whole thing is a ponzi scheme, tho' regulated(somewhat) and legal. all you people holding on to cash need to start getting in on this. bernie showed the world how to make money and i am totally convinced there were no "victims" only accomplices. bernie, and his cronies, made the big mistake of religiously hiding their money in a swiss bank instead of spending it to keep commerce going. keep money moving through the systems and everybody will be wealthy. like cramer says....BUY BUY BUY, SELL SELL SELL, SPEND SPEND SPEND! THAT'S ALL WE NEED TO DO. LET'S GET WITH IT AMERICA!!! when everybody is wealthy there will be no more complaining and pissing and moaning, no more negativity. money is NOT the root of all evil, religion is.

Jul 03 09:20 AM

[pftittl:]

Manic much?

Jul 03 10:33 AM