REALITY CHECK: US FIRMS DOUBT CONSUMER LINK TO STRONG STOCKS
By Gary Rosenberger
NEW YORK (MktNews) - U.S. consumer spending and borrowing are not being driven by the rising value of personal stock portfolios, say business officials.
Retailers say most spending in the past several years has been driven by the middle class, whose stock portfolios are geared more toward retirement than current spending.
Lenders say securities and other paper holdings are a relatively minor consideration when it comes to lending and are not often presented as collateral, and that it would therefore take more than a deep market decline to put many loans in jeopardy.
Car dealers say they do not feel especially vulnerable to the ups and downs of the stock market, and say almost no car buying has been fueled by the long-lived rally in the stock market.
For one car dealer, the Dow Jones industrial average bears little relationship to the monthly ups and downs of his business or of his customers' ability to pay off loans.
"For most people the stock market consists of either an IRA or 401K. I don't think, for the average middle-class person, that the stock market is going to have any impact on their ability to pay their bills," said Dick Strauss, CEO of Dick Strauss Ford in Richmond, Virginia.
"Obviously, the stock market is a barometer of how good my customers feel," Strauss said. "If their quarterly statements on their 401K plans show significant increases, it does give them a feeling of well-being and a more optimistic view of their future."
To the extent that people feel "good and optimistic, they tend to open up their purses," Strauss said.
"On the other hand, we wouldn't have even one in a 100 come in to our dealership and buy a $35,000 Expedition because they made a killing in the stock market," he said.
"Most of our customers are middle-class or upper middle-class and I don't think they're in a position where they'd be able to make a killing anyway," he said.
The same sentiment applies to retailing in general, according to Rick Gallagher, publisher of the National Retail Federation's Stores magazine.
"The retail rally that we've seen for the last 18 months has been driven by working class people," Gallagher said.
"If they own stocks, they own them in indirect ways that contribute to their retirement but won't do much in terms of their disposable income," he said.
"The middle and working classes have spent every nickel they can and then some, which is why we've seen Kmart, Target and TJMaxx doing so well," he added.
The rich are more vulnerable to volatile market -- and in fact have "moderated their spending since June of last year," largely because of uncertainties in their stock and bond holdings, he said.
But he added that the rich have trimmed retail spending without too much notice.
"There is a fiction that has been made up by rich people that consumer spending is tied to movements in the stock market -- that everyone else is like they are," Gallagher said.
"That thinking is completely out of touch with the concerns of average Americans who care about the price of gas for their next vacation, the cost of heating their homes this winter or whether or not they will be laid off," he said.
A Westchester County Jaguar dealer said his customers have not been fazed by a relatively volatile stock market but a big pullback would be another matter.
"I think there's been a loosening of spending in the last 24 months because of the stock market -- and many of my customers are people who directly work in the market or are heavily invested," said Vincent DiSimone, who owns White Plains Auto Group. "With a serious correction, yes, they would pull back."
DiSimone noted that around 30% of his customers are people in their 30s and 40s "who come in with financial statements that are beyond anything you would expect for that age group -- they wouldn't have had those dollars were they not in the market."
On the other hand, DiSimone said stock portfolios alone are no substitute for income and other financial information needed to qualify for a loan.
"No one says I made a killing and went out and bought a car," he said. "The stock market would have to go down to 8,000 or even 7,000 before it made a big difference in my business."
An official for a large consumer lender said there is little connection between consumer spending, the soundness of loans and the performance of the stock market.
"The stock market is a non-issue for us," said Dan Jarvis, a spokesman for Ford Motor Credit Co.
"When people apply for auto loans we don't go into stock portfolios -- we go into income, assets and liabilities and credit history," Jarvis said. "We do not look at stocks or securities when deciding on car loans." "A potential stock market downturn won't affect overall car sales and loans," he said. "Stock market dips and peaks is only one of many factors that has led to an unprecedented economy and increases in spending and auto purchasing in the last couple of years," he said.
Other factors of equal or greater importance when it comes to consumer spending have been "record low inflation, record low unemployment, record low mortgage rates," he said.
"Mortgage refinancings have also given people more disposable income and wealth," he said.
"If the stock market took a downturn, well, that's only one factor that has created wealth in the last few years," Jarvis said.
As to a stock market downturn's impact on the performance of loans already out there, Jarvis said it would have little to none.
"Directly it would have no effect -- but obviously if someone is a heavy hitter in the stock market, he may have trouble paying back loans," he said.
"But someone who is going to be that much affected by a downturn in the stock market usually has plenty of other assets and one vehicle won't be that much at risk," he said.
Nor is the stock market a big factor for the average homebuyer, according to Jim Zeumer, a spokesman for Pulte Home Corp., the nation's largest home builder.
"The average consumer is most concerned with how much their monthly payment will be, so the value of their 401K portfolio isn't a very important consideration in making a home purchase," he said.
"What has most likely been the more influential factor is the increased value of their existing home and the changes in tax laws that enable them to realize gains with minimal tax consequences," he said.
"Consumers are tapping this wealth by selling their exisitng home and buying new construction," Zeumer said.
"Where we see some impact from higher stock market valuations is on people buying a second home or retirement property," Zeumer said. "These individuals are buying property they may use only seasonally or when they retire three to five years from now, and are using some of their stock market gains to fund this transaction."
Zeumer noted that stock portfolios are not generally used as collateral on loans to buy homes, since the property itself is the collateral that backs the mortgage.
"Now I'm sure there are some IPO millionaires who have sold their stock to buy a mansion -- these aren't Pulte's typical customer," he said. "We aren't a custom home builder, which is where you might see more of an impact from higher stock prices."
Editor's Note: Reality Check stories survey sentiment among business people and their trade associations. They are intended to complement and anticipate economic data and to provide a sounding into specific sectors of the U.S. economy. |
