A View from Here

Bill's Sisson's weekly Trade Only blog

Luxury spending and the market’s roller coaster ride

Somewhere in the recesses of my brain I heard echoes of frothy headlines from the heady days of the dot-com bubble. Remember pets.com?

The headline that prompted the involuntary twitch sat atop an Aug. 3 story in The New York Times: “Even Marked Up, Luxury Goods Fly off Shelves.”

The article outlined how luxury brands such as Gucci, Louis Vuitton, Chanel and Yves Saint Laurent were “zooming” out of high-end retailers even as many Americans were still deleveraging — or looking for work. Sales numbers for luxury auto manufacturers Porsche, Mercedes-Benz and BMW also were cited as prima facie evidence of the trend, as were $250 ties, $2,495 boots and $1,650 facial cream (for a whopping 16 ounces).

“The rich do not spend quite as they did in the freewheeling period before the recession,” the article declared, “but they are closer to that level.” It was enough to make you want to touch wood as the markets gyrated wildly during the past week.

We in the marine sector certainly have been the beneficiaries of the bull market as well. Luxury boat brands — so-called niche brands — were one of those bright spots amid plenty of low water. And the buyers of those boats were upright, well off and beneficiaries of the rising market. Many were buying with cash.

The Times story also quoted Moody’s Analytics chief economist Mark Zandi: “This group is key because the top 5 percent of income earners accounts for about one-third of spending, and the top 20 percent accounts for close to 60 percent of spending. That was the key to why we suffered such a bad recession — their spending fell very sharply.”

Keep in mind: Consumer spending accounts for more than 70 percent of GDP.

So what is — or was — at work? According to the Times piece, the return to luxury spending could mostly be attributed to the rising stock market and what it referred to as “shopping psychology.” We’d call it pent-up demand, or perhaps recession fatigue.

Without labeling it as such, the article also was describing the so-called “wealth effect,” the idea that businesses and consumers increase their spending as their perception of wealth increases. The rising stock market has been the primary driver of “animal spirits” and its cohort, the wealth effect. I wrote about the impact of the wealth effect in a column last February.

Two days after the luxury-market story appeared, the Dow ended the week down nearly 700 points, and we were looking at this headline: “Second Recession in U.S. Could be Worse Than First.” On Monday, Aug. 8, the first trading day after Standard & Poor’s downgraded the government’s long-term debt, the Dow lost 634.76 points, the sixth-largest point drop in its history. Whoa, Nellie!

Yesterday, U.S. stocks rallied after another wild roller-coaster session, with the Dow closing up 430 points after the Federal Reserve said it would leave interest rates unchanged through mid-2013. A stealth version of QE2?

More than one prognosticator called it an “historic day of volatility.”

Uncertainty is anathema to large discretionary purchases — and what happened during the past week was uncertainty on an historic scale.

What does the future hold? Short-term, it’s hard to imagine we’re not going to be picking our way around a fair bit of unsettled weather as events in Europe, Washington, Main Street, Wall Street and corporate America continue to unfold. And concerns about a double-dip recession weren’t erased by a single day’s move.

Will the Fed’s statement yesterday regarding interest rates keep animal spirits alive as investors weigh volatility vs. the potential for decent returns from the stock market as they determine where to put their money? Time will tell.

And the impact on boat sales? On the luxury segment of the boat market?

As one market strategist remarked in describing the recent uncertainty and wild swings, “It’s like water. It finds its right level.”

Comments

2 comments on “Luxury spending and the market’s roller coaster ride

  1. TakeMeFishing

    Hopefully, low interest rates and pent up demand will work to buoy boating through these difficult economic times. Thankfully, it’s still a singularly unique and compelling experience. Some good news would certainly be welcome.

  2. Greg Proteau

    Bill – I always feel a bit queezie when we lump boats, especially family runabouts, skiboats and fishboats, into a generic “luxury” spectrum. It seems to set us up for the old argument that all boats are “yachts” and easy targets for the taxman. On the other hand, it sure is nice when people with discretionary funds choose to spend it on those same, or more upscale, craft.
    We’ve been in a low interest rate environment for several years now and this hasn’t spurred boat sales – some suggest it’s because lendable funds are still too tight.
    In the August 10 Wall Street Journal, a story titled “Luxury Sales at Risk” provided a possible answer to your question about the relationship of falling stocks to luxury product demand: “We believe that high-income consumer spending is at greater risk as the top 20% of income-earning households own 89% of equities,” was the quote from Citigroup analyst Deborah Weinswig,
    Wild swings in the equity markets surely can’t be encouraging for consumers of anything, from real estate to diamonds or bassboats to a gallon of milk.

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