The stock-market sell-off is going to be a significant drag on the U.S. economy this year as wealthy households feel its impact, according to Goldman Sachs Group Inc.
Lower equity prices could take half a percentage point off U.S. gross-domestic product growth in 2019, with overall tighter financial conditions restricting expansion by around 1 percentage point, Goldman economist Daan Struyven wrote in a note Tuesday. In October, he had said the positive wealth effect from equity gains in 2017 and early 2018 had likely evaporated.
“The hit to the wealth level from a 1 percent decline in stock prices is now about three times larger than in the late ’80s for the top-10 percent of households and a third larger for those in the 50-90th percentiles,” Struyven said, citing the increase in equity holdings as a share of disposable household income.
Struyven argued against the idea that the wealth effect from the stock market might be limited due to a higher concentration of stock ownership than in previous decades, and a lower propensity to spend among rich households. To prove that this thesis doesn’t hold up, he cited increases in equity holdings, as well as a high sensitivity of luxury-goods spending to stock-market fortunes, as evidence.
That’s at odds with a paper from the National Bureau of Economic Research in 2013 that finds “at best weak evidence of a link between stock-market wealth and consumption,” and asserts that the housing market has much more of a wealth effect.
The share of personal consumption expenditures spent on jewelry is “highly correlated with moves in the stock market,” Struyven wrote in the Jan. 15 report.
“Focusing on a sample since 1995, we find large effects of the stock market on luxury spending,” Struyven said. Regressions of spending growth on stock price changes confirm a strong relationship “for jewelry and watches, pleasure boats and pleasure aircraft.”
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