Don't Underestimate the Wealth Effect

 | Mar 01, 2013 | 11:16 AM EST
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We spend so much time talking about the price at the pump. We try to figure out the impact of the end of the tax holiday. We endlessly try to assess the damper caused by Washington's in-fighting.

But you know what we don't do? We don't talk about the impact of rising stock portfolios and increasing home prices, the two critical assets for tens of millions of people in the United States.

About 67% of the people in this country own a house. That's an astounding number. Ninety million people have their savings tied up in stocks in one form or another, either through 401ks or IRAs or pensions or just investments made as a matter of course.

Given that 19 out of 20 regions in this country have experienced increasing home values in this last year north of 5%, and given that we are almost at all-time highs on stocks, these countervailing forces broadly trump whatever few dollars a week that are taken out by the repeal of a payroll tax holiday or rising gasoline prices.

Remember, that the payroll tax holiday was just a holiday and everyone presumed the holiday would end. The price at the pump is certainly meaningful, but less so than even the spike five years ago because of the replacement of gas guzzlers by more efficient cars.

I think this is a huge reason why consumer confidence, according to the Michigan survey, spiked instead of declined. I believe it can account for the maintenance of spending even as we learned today that personal incomes fell 3.6%, the worst in two decades. People certainly feel they can take out more credit with these two rising assets and we saw an expansion in consumer debt just this last month.

The impact on stocks can be profound, too. There's a reason why Sears (S) could have earnings stabilize, even if they aren't anything to write home about. Given the Sears bent toward household goods and appliances, you can understand why it might be able to stem the losses. Garden equipment, Kenmore washers and dryers and Craftsman Tools all go better in a rising home value environment.

The strength can transcend all the way to Best Buy (BBY), which used to be considered a play on the wealth effect because so many of the purchases people make from Best Buy involve discretionary goods. Just think of it, do you want to put a home theater in your house if your house is losing value? If you are feeling glum about your home, do you want to bother to get that big screen television from someone who installs it when you might be able to save a little dough at Costco (COST) and cart it, haul it and install it yourself?

I believe that home value improvement has far more to do with the recovery we saw in Best Buy's numbers than anyone else seems to be calculating.

Do not underestimate the wealth effect's ability to transcend the day-to-day woes that have left so many thinking this stock market must come down, The thesis doesn't fit, in large part because of the self-fulfilling prophecy of stocks being at five-year highs and homes rallying in price. Think of the bigger context and so much of the advance in stocks can be explained as more than just a short squeeze and irrational exuberance.

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