The Wealth Effect and Consumer Spending

The Wealth Effect is the term used to describe spending increases that tend to accompany an increase (or perceived increase) in wealth. The wealth effect premise says that when stock portfolio, real estate, and other personal wealth values increase, consumer spending tends to rise as people feel more secure about their wealth. To express it in another way, each dollar gain in asset appreciation leads to a partial spending of that gain, even if the gain isn’t realized through the sale of the asset.

The wealth effect is seen as particularly powerful during bull markets as gains in individual portfolio values spur consumer spending. The opposite is true during bear markets as consumers are more likely to decrease spending due to a lack of confidence in the economy.

______________________________________________________________

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

« The Benefits of Using a Limit Order | Home | Descending Price Channels within Long-term Price Uptrends »