As per the analysis was done by Daan Struyven, an economist at Goldman Sachs, spending on luxury goods, watches, boats, and jewelry is likely to fall. This fall is followed by recent stock jitters seen in the market since last September. The decline in stock prices could decrease luxury spending by wealthy spenders. This decline might also have an adverse effect on the gross domestic product in 2019. He emphasized the wealth effect, a theory in which personal spending follow stocks has been elaborated. This effect is relevant as equity holdings in past recent years have tripled as a share of disposable income.
Luxury Goods Likely To Experience the Highest Backslash in Times of Weakening Stock
The wealth effect is likely to impact heavily on the luxury sector, as the wealthy individuals hold the maximum stocks. While discussing this, Struyven stressed the spending on jewelry and watches along with pleasure aircraft and boats. For instance, a 10% increase in equity prices led to 6% rise in spending on watches and jewelry and 13% rise in pleasure boats.
In this market scenario, Tiffany is already down by 40% as compared to the previous year. Other companies like Richemont have also seen shares drop by a third.
In the last recent years, economist posed their opinion on the strength of wealth effect if its decline. This is highly important because most of the wealth is concentrated in the hands of wealthy people. According to Struyven, top 1% now holds 50% of the total household equities. It is 39% higher than that was in the 1980s.
However, most of the wealth is saved by the wealthy; therefore, it has less impact on spending. Now that number has tripled as a share of disposable income than that in 1980s, even 1% move in stock will have a huge impact.