NEW YORK: 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 shines."
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 properties. "They're seeing opportunity, both as an investment and as a lifestyle change," he said.
With US 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 US 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 US Federal Reserve and signs of improvement in the US 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 the wealthy. 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."