Stock Market Rout Could Hit Wealthy Households In 2019

With the stock market selling off in recent weeks, Goldman Sachs is warning that wealthy households will feel some of the pain.

According to a report in Bloomberg, citing a research report Goldman Sachs Economist Daan Struyven penned on Tuesday (Jan. 15), the economist warned that the declining stock market could result in half a percentage point coming off the U.S. gross domestic product (GDP) growth for this year. Struyven also forecasted expansion being restricted by about 1 percentage point because of tighter financial conditions. Bloomberg noted that in October, he said the positive wealth effect from stock gains in 2017 and the early part of last year have all but disappeared.

“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 wrote.

He went on to say that those who think the wealth effect from stocks is limited because of a higher concentration of stock ownership compared to decades past and more frugal household spending patterns are wrong. Struyven pointed to the fact that stock holdings and spending on luxury goods are tied to stock market gains.

“Focusing on a sample since 1995, we find large effects of the stock market on luxury spending,” Struyven said, noting that as stocks rise, there is a strong relationship “for jewelry and watches, pleasure boats and pleasure aircraft.” The economist added that the share of money spent on jewelry is “highly correlated with moves in the stock market.”

Bloomberg pointed to a 2013 paper from the National Bureau of Economic Research that found the opposite, stating that “at best,” there is weak proof of a link between wealth from the stocks and spending patterns, arguing that the housing market has a bigger impact on the wealth effect than stocks.