Around the Street: Stocks' $8 Trillion Haircut

The experts weigh in on the "wealth effect," the labor market, the Federal Reserve's next move, and trends in consumer spending

From Standard & Poor's Equity Research

Feeling poorer these days? Between the big hit to the stock market and declining real estate values, consumers appear ready to shut their wallets, based on recent data reports. Changing patterns in consumer spending—and saving—could have a big impact on the broader economy. Here are some insights on those trends, along with views on the labor market and the Federal Reserve's next move, from Wall Street economists and strategists, as compiled by BusinessWeek and S&P MarketScope staff on Oct. 20.

Tobias Levkovich, Citigroup (C)

U.S. stock market losses in the $8 trillion range over the past 15 months are likely to affect consumer expenditures data more than declining real estate values. With higher-end consumers suffering staggering drops in wealth, a more frugal society may emerge, changing the nature of America's consumption society, at least temporarily. The declines in gasoline prices from highs earlier this year could translate into better than $150 billion of annualized spending shifting from gas tanks to malls, offsetting an estimated 3.5 million of lost jobs in terms of the aftertax spending effect, to a great degree.

However, we suspect the "wealth effect" could be much greater as investors study their brokerage statements and quarterly 401(k) reports. While there is the view that wealthier Americans can weather any storm, there is ample anecdotal evidence now that the combined effect of falling stock prices globally, deteriorating home values, reduced credit availability, and even fear of bank deposit safety is weighing on consumer confidence. In addition, increased visible restraint on conspicuous consumption may become even more evident in ensuing months, holding back higher-end retailers, expensive recreational activities, luxury vehicle sales, and other very discretionary purchases.

Those companies that can generate either real or perceived value should benefit in this environment, leading investors to discounters such as Wal-Mart (WMT) or Home Depot (HD), value-oriented restaurant chains such as McDonald's (MCD), as well as those entities that can convince buyers of the need to own or use their products, including Apple (AAPL), Google (GOOG), Nike (NKE), and Comcast (CMCSA).

Michael Englund, Action Economics

In total, the sharp U.S. retail sales decline reported last week for September suggests that we are likely seeing a powerful pullback in household spending relative to income as consumers seek to deleverage household balance sheets—just as banks have been doing since last August. The pullback, and associated surge in the savings rate, is sending a negative ripple through the economy often described as the "paradox of thrift." The same paradox applies to business spending, which is seemingly participating in the downward spiral as suggested by last week's Philly Fed, Empire State, and industrial production data.