The bullish stock market may have people bragging about their 401(k) balances, but they’re also running to the stores.
Stock market trends fuel people’s spending habits, and the link is more pronounced for households on the bottom half of the income spectrum than the top, according to a study of Swedish households distributed Monday by the National Bureau of Economic Research. The researchers looked at wealth tax data from 1999 to 2007, and measured consumption by looking at disposable income.
Consumption in lower-income households — which make up 7% of overall stock holdings — jumped 10% when the stock market was doing well, while consumption in higher-income households increased by just 5%, researchers found. The study comes as consumer spending has reached a six-year high, while savings rates have plummeted.
And it doesn’t matter if they actually sell those stocks. Paper wins are just as much an incentive to go shopping, the study concluded. Households react just as much to potential capital gains as they do to realized capital gains, according to the study, conducted by researchers at Harvard Business School, the University of California, Berkeley and Lund University in Sweden.
See: Wall Street expects bull market to make history in 2018
Previous research supports the latest study. About five cents of every dollar of a wealth increase is spent soon after it is earned, according to one report published by the Federal Reserve Bank of New York’s Economic Policy Review in 1999. And, of course, people pull back their spending during a bearish stock market.
Another study from Mary Washington College in 2003 found there was a positive link between consumer spending and the stock market, but it depended on market conditions — the weaker the investment growth, the less spending. The 2003 study was during a volatile time in the stock market, which made consumers less likely to spend.
Also see: Dow 25,000 only brings the bull market closer to a painful end
High-income investors are cautious with short-term investments, according to investment research firm Spectrem Group. Many of that group, particularly those at the highest income level of the study, are putting money into savings accounts. One theory: They may simply feel like they have more to lose and spend more time tracking their various investments.
And higher-income investors may have reason to be more cautious. Some financial experts expect to see a turn in the nine-year bull market sometime in the next year or two. But what will that look like? For Craig Johnson, chief market technician for Piper Jaffray who predicted a long-term bull market in August 2012, the market may see a correction of as much as 20%.
Investors shouldn’t try to understand market turns, and they should set out a plan in advance based on the movements in the stock market, financial advisers say. More often than not, they should set and forget their portfolios, and ride out the good times and the bad. If anything, rebalancing portfolios should be done to ensure they’re diversified.