Crescenzi: Can This Rally Excite Consumers?

Chain store sales rebounded last week, with sales up 0.4% versus the previous week, according to new data from the International Council of Shopping Centers (ICSC). On a year-over-year basis, sales are up 3.6%, ICSC data show.

In the weeks ahead, high-frequency data such as chain store sales will provide clues as to whether or not the equity market’s rally is positively influencing consumer behavior. The “rally” is of course in the eye of the beholder; equities have largely moved sideways this year.

Nevertheless, to the extent that consumer behavior was negatively influenced during the summer months by the market sell-off that occurred in May, the recent rally could similarly affect behavior in the opposite direction. Data show that the 3-month change in equities correlates well with retail sales, which means the equity market’s rebound might soon boost consumer spending.

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The wealth effect for equities is generally believed to be around 4 cents on the dollar.

In other words, for each dollar increase in wealth, spending will tend to increase by 4 cents.

This means that the 10% equity-market rally of the past three months, which boosted wealth by about $2 trillion, could boost overall spending by about $80 billion.

Endeavoring to repair their balance sheets, households could well refrain from boosting their spending as much as normal when equities rally, limiting any boost to the economy. While the magnitude of potential impact is unclear, the direction of impact almost certainly will be positive.

Continue to watch data on the savings rate for clues on the verve and proclivity toward spending. Confidence levels are low, which makes the hurdle to increased spending and escape velocity for the economy much higher. Perhaps clarity on taxes and a sense of change following the upcoming election will provide a boost to confidence, or at least a smaller drag.

Tony Crescenzi is Senior VP, Strategist, Portfolio Manager Pimco. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the author of "Investing from the Top Down," "The Strategic Bond Investor," and co-author of the 1200-page book "The Money Market."