The effects of wealth give and take away.
This week’s stock market volatility, particularly Friday’s (April 12) plunge following big bank earnings, has shed light on the value of stock market holdings.
Specifically, it highlights who owns those stocks and what it means when we felt like we were flush with cash and suddenly we aren’t.
As of this writing, the Dow Jones Industrial Average fell 1.3% on Friday, but is now up 0.8% year-to-date. But he’s still up 12% over the past 12 months. It’s important to note that while there are “broader” market indexes out there, the Dow has historically been the benchmark for market trends.
Increased participation in the stock market
Recently too 2022, Federal Reserve System reportbetween The most widely held type of financial assets are retirement accounts, which include individual retirement accounts, Keogh accounts, and certain employer-sponsored accounts such as 401(k) accounts. These accounts were held by 54.3% of family members. According to the Federal Reserve, direct family ownership increased significantly from 2019 to 2022, from 15% to 21%, the largest change on record.
Regarding income participation, Fed data shows that stock market participation is estimated to increase across income profiles in 2022. 34% of households in the bottom half of the income distribution owned stocks, compared to 78% of households in the upper-middle group. , measured by income.
The takeaway here is that a significant percentage of us own stocks either in stock market accounts or as individuals. And over the past few years, spending trends have remained stable. The Dow Jones Industrial Average has risen about 45% since the pandemic took hold.
The concept behind the wealth effect is simple. Consumers spend more when the value of their assets – their accounts, investments, and real estate they own – increases.
But the opposite is also true. When wealth, or assets perceived as wealth, declines, we cut back on spending, perhaps convinced that we don’t have enough “backup” in the bank to support that spending.
As they might say, confidence is everything.
PYMNTS Intelligence Data In the current inflationary environment, more than 60% of consumers say price is a factor in deciding what to buy, and 29% say price is the most important factor. Similarly, when deciding where to shop, more than 48% say price influences their decision.
Price is a key factor, as more than 80% of consumers say their wages are not keeping up with inflation. If you feel that your income isn’t enough to drive your spending, the wealth effect can go a long way in filling the gap. Given the market turmoil, consumers may also be fickle at the checkout.
