By Steven C. Johnson and Ashley Lau
NEW YORK, March 5 About an hour after the Dow
Jones industrial average hit a record high on Tuesday, Overland
Park, Kansas-based financial adviser Brad Stratton got an e-mail
from a client asking how she could "make hay while the sun
Stratton, a former Merrill Lynch broker who set up his own
firm last year, said he's been fielding a lot of such calls
lately. Many are from clients who want to capitalize on
stock-market gains by purchasing second homes or investment
"They're seeing opportunity, both as an investment and as a
lifestyle change," he said.
With U.S. stock market indices more than doubling since the
financial crisis and the American housing market recovering,
there are increasing hopes on Wall Street that a wider "wealth
effect" could set in. That would see people with stock
portfolios and homes feeling richer and more confident,
prompting them to spend more on everything from home
improvements to luxury cars and meals in restaurants, creating
jobs in the process.
The Dow hit a record closing high on Tuesday, part of a
broad market rally that has lifted the oldest U.S. market gauge
nearly 9 percent so far this year. The achievement is
particularly noteworthy given it is set against a background of
government spending cuts and tax increases.
Solid corporate earnings, unprecedented support from the
cheap money policies of the U.S. Federal Reserve and signs of
improvement in the U.S. economy have helped investors overlook
concerns about measures to rein in the government's budget
deficit and still-high unemployment.
The stock market's gains will be felt disproportionately by
Ric Edelman, a Fairfax, Virginia-based independent financial
adviser, said one of his clients called this week and asked him
to send $62,500 because he had decided to buy a Porsche.
That client, Edelman said, was reluctant even to buy a used
Corvette for $10,000 just a few months ago, but he had since
realized that his portfolio gains mean he could afford to spring
for the car he really wanted.
"He now accepts the fact that he can afford it and fell in
love with the car and decided to buy it," said Edelman, who
spoke to the client while he was at the dealership. "There was
no way he would have done that before."
THE RICH AND THE REST
At the Miami Boat Show in mid-February, enthusiasts were
throwing money around again this year in ways not seen since
before the financial crisis, said Stephen Heese, chief executive
of premium power boat builder Chris-Craft.
"In general they want to live their life and they're tired
of austerity," Heese said of his customers, adding he expects
sales growth in the order of 25 percent this year. "They're back
to wanting to reward themselves."
Chris Craft's boats range in price from $50,000 to $600,000,
with an average price of about $200,000.
Similarly, Cristina Mariani-May, co-CEO of Banfi Vintners,
said the winemaker's luxury vintage, Poggio alle Mura Brunello
di Montalcino, which costs about $75 retail or about $150 at a
restaurant, has been selling well over the past six months.
"We can't produce enough. What we've seen is that people
were holding back for a while, buying an entry (less
expensive)bottle, but now we're seeing that they're going back
to the luxury," she said.
Certainly, Americans generally have stronger personal
balance sheets than they did just before the financial crisis.
The household financial obligations ratio, a measure of the
ratio of debt payments, car payments, insurance and property tax
payments to disposable income fell to 15.74 percent in the third
quarter of 2012, according to the Federal Reserve, down from a
peak of nearly 19 percent reached in the third quarter of 2007,
just before the market hit its last top.
The Fed's commitment to stimulus policies, through record
low interest rates and its quantitative easing program of bond
buying, has been a big reason for the market gains. Writing in
defense of the central bank's easy money policies some two years
ago, Fed Chairman Ben Bernanke said stocks would be an indicator
of its success.
"Higher stock prices will boost consumer wealth and help
increase confidence, which can also spur spending," he wrote in
the Washington Post in late 2010. "Increased spending will lead
to higher incomes and profits that, in a virtuous circle, will
further support economic expansion."
Economists say that sentiment does seem to be improving.
"It's already the case that people are feeling a little
better, and one of the reasons the consumer hasn't cooled off in
the face of higher taxes is that they are starting to feel the
benefits of higher home and equity prices," said Ethan Harris,
chief U.S. economist at Bank of America Merrill Lynch.
Yet so far, not much of this has translated into hiring that
would lift the broader economy. While the jobless rate has
drifted lower since hitting 10 percent in 2009, it remains at an
uncomfortably high 7.9 percent. And many of the unemployed have
been so discouraged that they haven't been looking for work and
don't count in the official rate.
The missing ingredient, many say, is corporate spending.
Despite strong earnings and sales, non-financial U.S. companies
had $1.7 trillion of liquid assets, or cash, on their books at
the end of the third quarter.
"Corporate engagement has been a real disappointment,"
Harris said. "Corporations are in great health and have been for
a few years but haven't been engaged. If you get them back, that
means more jobs, which would helps make consumers more
confident, and then we would get another wave of growth."
The housing sector is also far from fully recovered. While
home prices have been rising since February 2012, more than 20
percent of mortgages are underwater and foreclosure rates remain
And the wealth effect from higher stock prices may not be
very pronounced in many middle-income families as their savings
are often concentrated in retirement accounts rather than active
brokerage accounts, said Mark Zandi, chief economist at Moody's
"It's one thing when you see wealth on paper and quite
another when you actually see it in your checking account,
sitting there for you to spend," Zandi said.
Meanwhile, many people are still wary of trusting gains in
the stock and housing markets after getting hammered in the
financial crisis, suggesting the wealth effect produced by those
sectors has been greatly diminished, said Henry Mo, a U.S.
economist at Credit Suisse.
In a study he co-authored, Mo found that between 1993 and
2012, 1 percent gains in housing and stock market wealth
explained just 3.3 percent and 1.1 percent of gains in household
consumption, respectively. But the 1993-2007 range showed gains
of 5 percent and 3.3 percent, respectively, he said.
The increased volatility in the past few years hurt
confidence in middle- and lower-income households, he said.
Also, memories of the stock market decline and its aftermath
caused many investors to simply miss the subsequent recovery.
While money has poured into equity mutual funds over the
last few months, that's been barely a drop in the bucket when
compared with the roughly $400 billion that had been pulled out
in the preceding years.
"It demonstrates once again that investors have been in the
wrong asset class," said Tobias Levkovich, chief U.S. equity
strategist at Citigroup. "They've stayed in a defensive posture,