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June 24, 2017

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Dow Jones record may up wealthy spending; others still wary

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 email 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 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 the wealthy.

Ric Edelman, a Fairfax, Virginia-based independent financial adviser, said one of his clients called this week and asked him to send US$62,500 because he had decided to buy a Porsche.

That client, Edelman said, was reluctant even to buy a used Corvette for US$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.

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 powerboat 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 US$50,000 to US$600,000, with an average price of about US$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 US$75 retail or about US$150 at a restaurant, has been selling well over the past six months.

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.

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