For evidence that the rich are recovering faster from the recession than people with lower incomes, take a trip to Tiffany & Co’s flagship Fifth Avenue store in New York City (if you can get in around this holiday time) and see who’s buying and who’s just browsing.
“We continued to see bifurcated performance, with declines in sales and transactions below $500, but double-digit percentage increases in most every other higher price category, indicating to us the diverging effects to one degree or another that the economy is having on consumer spending,” said Mark Aaron, Tiffany’s Vice President of Investor Relations, on the company’s third-quarter earnings conference call on Nov. 24th.
But this divergence in wealth hasn’t hurt the stock. The shares hit an all-time high this week following a note by Morgan Stanley, which cited the company’s ability to pass along higher input costs to its rich consumers, who likely won’t notice.
“The more aspirational customer in America is still under pressure,” said Kimberly Greenberger, Morgan Stanley retail analyst, in the note. Greenberger and Louise Singlehurst also cited the growing number of China’s millionaires as another reason to be bullish.
A weak housing market and high unemployment is taking a greater toll on individuals with lower incomes, while the rich, whose wealth is tied more to investments, is benefiting from a rising stock market this year.
“Unfortunately, there has been no improvement in consumers’ financial prospect in the past two years,” wrote Richard Curtin, the chief economist for the market-moving Thomson Reuters/University of Michigan consumer survey, in the organization’s release last week. “While consumers clearly believe that the recovery has gained some traction, most still think that the economic gains will be too small to improve their own job and income position anytime soon.”
Middle-income consumers did get some good news today as pending sales of existing homes rose by a record 10 percent. Still, the housing numbers have been volatile as of late. The S&P 500 is up more than 9 percent on the year.
“Given Tiffany’s higher income customer and exposure to the New York Area market, equity market levels have historically shown high correlation to domestic same store sales performance,” wrote the Morgan Stanley analysts. “Our regression analysis indicates a 56 percent correlation between the quarterly percentage change of the S&P 500 and domestic same store sales on a two-quarter lag.”
To be sure, the risk to this trade continuing may depend on the extension of the Bush tax cuts for all income earners. If Congress decides to let the income tax breaks expire for the higher income bracket, the shares could take a hit, analysts and investors said.
* For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.
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