A View from Here

Bill's Sisson's weekly Trade Only blog

The ‘wealth effect’ and one dealer’s record January sales

With the Dow Jones Industrial Average closing last Friday above 14,000 for the first time in more than five years, I thought this would be a good time to revisit the notion of the “wealth effect,” especially seeing how the Miami shows and the nine-day New England Boat Show start next week.

I haven’t heard or used that phrase in some time. The wealth effect is the idea that consumers and businesses increase spending as the perception of their wealth improves. The once frothy housing market certainly contributed to that sense. So does a bull market in stocks. During the last four weeks, investors have put more than $34.2 billion into stock mutual funds and exchange-traded funds, an amount greater than in any four-week period since 1996, according to The Wall Street Journal.

“I’ve liked what I’ve been seeing economically,” the paper quotes chief investment officer John Buckingham, of Al Frank Asset Management, as saying. “It’s not too hot, not too cold — it’s just right to keep the Fed from tightening, and yet there is underlying improvement.”

So is the wealth effect helping boat sales?

Massachusetts dealer Larry Russo Sr. says high-net-worth buyers are fueling sales at his dealerships.

“We just had the best January on record,” said Russo, president and CEO of Russo Marine of Medford, Mass., a Brunswick dealership that sells Sea Ray, Boston Whaler, Bayliner and Meridian. “We sold more units and had more revenue than any other January since we have been keeping records. What is most rewarding is that we were not influenced by a boat show, special event or any unique sales promotion. We did not attend the Providence [R.I.] show this year, so none of the business was generated from our internal efforts. It’s a very good sign that the market has awakened. These buyers came on their own terms.”

The unit sales mix, Russo noted, was one-third new, one-third preowned and one-third brokerage. “Good balance,” he said, “although I wish the mix would shift more toward new. The upcoming New England Boat Show will determine whether January was a fluke or the market has returned. We are very encouraged.”

NMMA president Thom Dammrich says the perception of wealth caused by the rising equity and housing markets has certainly helped the new-boat market.

“Yes, it is the wealth effect at work, and it does make a difference on new-boat sales,” Dammrich told me Tuesday. “And it is not only their 401(k)s and investment accounts. Housing is rebounding and people feel better knowing that home prices were up last year.”

Taken together, these factors and others not only lead to greater confidence, Dammrich said, but also to a willingness to spend, to make an investment in something such as a new boat for the family. Folks want to get on with living again.

“People have seen the bottom, bounced off the bottom, and things are looking up again,” he said. “Fear is gone. The 2013 boat shows have seen some very strong demand for new boats, and consumers just aren’t talking about the economy. They are getting on with their lives.”

I also asked lending expert Jim Coburn whether post-recession fatigue and recent market highs might not pull folks off the fence and into the market.

“As for the wealth accumulators, we believe a portion of them were ‘hit’ by the Great Recession, and another segment of them were not,” said Coburn, managing partner of Coburn & Associates. “I agree with you that many possess the post-recession fatigue you mention and are playing their finances more carefully. Some had the opportunity to enjoy their current yachts, if they kept them, and others unfortunately (for the marine industry) discovered new journeys and lifestyles that took them beyond recreational boating.

“The recent bull market and projected optimism,” he continued, “is bringing some of these folks around.”

Coburn said the average boat buyer/consumer is affected much more by consumer confidence than the so-called high-net-worth individuals. “As I have mentioned at roundtables and conferences, the Consumer Confidence Index needs to be 100-plus, or at least on a fast track in getting there, for the players to be in the game and off the sidelines,” he said. “It would be good if the progress is a steady trip back to that 100 territory.”

Small point moves up and down, he continued, have not done the industry any favors in the past couple of years. “Of course, the real employment numbers, etc., dictate where it’s going,” he said.

The CCI has not been 100 since early 2007, Coburn noted. The index stood at 58.6 in January, down from 66.7 in December.

“Yes, there’s pent-up [demand], for sure,” Coburn said. “The biggest portion of potential new and return boat buyers is slowly beginning to resurface. However, they are spending for those new boats in different ways, compared to pre-2007, even pre-2001.”

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