- Goldman Sachs sees wealth effect supported by housing
- 13% of U.S. households directly own stocks, says UBS
The global-recession fears of stock investors may not yet prove self-fulfilling.
“At a certain point the markets become reality if they affect the behavior of regular people,” Steven Schwarzman, chief executive officer of Group LP, told Bloomberg Television last week. “At this point, I don’t think that’s happened.”
Also breathing easy is David Mericle, an economist at Goldman Sachs Group Inc., who published a report on Tuesday citing research showing that a $1 decline in financial wealth typically reduces consumption by about 2 cents over the next couple of years. So a 10 percent decline in U.S. equities should restrain consumption by almost 0.4 percentage points.
The good news is that half of this should be offset by gains in American housing wealth. Sales of existing housing were the strongest since 2006 last year, while the unemployment rate is the lowest in seven years.
“Our analysis suggests a relatively modest drag from wealth effects in 2016,” said Mericle.
Even less worried is Paul Donovan, an economist at UBS Group AG in London, who echoes Mericle by saying labor and housing markets are more important drivers of the U.S. economy given just 13 percent of households directly own stocks.
This argument is also backed by Deutsche Bank AG economists, who say while shifts in the S&P 500 often drive consumer sentiment surveys, that doesn’t translate through to actual spending. That’s because 80 percent of U.S. equities are owned by the richest third of households, who spend only 65 percent of their pre-tax income compared to lower paid families who spend 1.7 times their income.
“There are reasons to suggest that the feedback for equities to the real world is significantly weaker at the moment than it has been in the past,” said UBS’s Donovan.
Among the other factors he gives are that the S&Ps 500 is more driven by manufacturing and mining companies than the services industry which make up a bigger share of the economy.
Publicly-listed companies also reflect just 15 percent of the U.S. economy, omitting the small- and medium-sized businesses which power it. While falling stocks typically raise the cost of capital for companies that’s not a problem at the moment with easy monetary policy keeping credit flowing, said Donovan.
Repeating the view of Credit Suisse Group AG CEO Tidjane Thiam that he doesn’t “like periods where the price of risk is distorted,” Donovan also says maybe the recent declines will prove healthy.
“For now the move in China and other equities markets should perhaps be considered a good thing, bringing markets closer to fundamental value,” said Donovan. “It is worth remembering falling equity markets are not bad, equity markets out of line with economic fundamentals are.”