Rapaport Magazine

Stock Markets

By Martin Rapaport
RAPAPORT... So how do you feel when the stock market drops 12 percent in one day? How about when it goes back up? How much of your life savings are tied up in the market? How secure do you feel?

It’s not just the stock market that’s going up and down; it’s your feelings and sense of security. Your life savings are at risk. Economic data, stock markets indices and foreign currency rates can be treated as abstract financial concepts in newspapers; however, when we start talking about your personal money, things get real very fast.

Money isn’t just about money. It’s about if we can buy a car or a house, get married, send our kids to college, afford insurance or retire. Money is about our quality of life, sense of well-being, self-confidence and identity. When stock markets surge and plummet, so does the mood of society. People feel great and want to celebrate when they make lots of money and they feel depressed and want to hide under their beds when they lose lots of money. So stock market prices aren’t just about finance, they are about the psychological well-being of society and a leading indicator of consumption.

The relationship between stock market activity and the psychology of consumers becomes more complicated as market volatility increases. In a perfect world, steadily increasing stock prices promote a sense of secure well-being as they create wealth. This is an ideal scenario for the development of luxury demand and, in fact, has been a primary driver of luxury demand in China, the Far East and India over the past year. China’s SSE 180 stock index surged 150 percent in 2007, creating a luxury brand boom and raising the roof on investors’ expectations and speculation.

As long as stock prices move upward, consumers can forgive an occasional correction while focusing on the medium-term positive movement. However, if the downward price movement is steep or prolonged, consumers begin to feel that they are losing hard-won money and their sense of financial security deteriorates. Consumers become confused. They are afraid to leave the market when prices are low and they are afraid to stay in the market because prices may fall further. They are stuck, uncertain, fearful and not in the mood to spend money on luxury items. Investors are consumers and increasing stock market volatility creates uncertainty, reducing luxury demand.

The positive and negative impact of the wealth effect on luxury demand is not just a matter of how wealthy people actually are but rather how wealthy they feel they are going to be. Changes in virtual wealth, such as an increase or decrease in the real estate value of a home that a consumer has no intention of selling, will impact luxury consumption. Changes in investment portfolio valuations will also impact demand even if the investor has no intention of selling. The propensity to consume luxury products is not merely a function of disposable income, but more importantly, the mood of consumers.

The impact of the stock markets on luxury consumption is not limited to the behavior of stock market participants. The economy is a highly sophisticated neural network of complex interactions. Changes in demand, whatever the cause, spill over into other areas. Lower housing prices created by the mortgage crisis, reductions in Wall Street bonuses, diminished disposable income due to higher oil prices, plummeting stock markets and a host of other factors interactively define demand, price levels and consumption. While specific forces may occasionally dominate the scenario, combinations of complex interactive factors define demand.

The current market for diamonds and jewelry is under pressure as external economic forces diminish U.S. demand for commercial goods that are in oversupply. Fortunately, foreign demand from rapidly expanding economies in China and India is picking up some of the slack and creating selective shortages in promotional and fine-quality goods. Surging prices for large certs have abated as declining stock markets reduce luxury demand from the wealthy investor class. Diamond speculators and over-excited rough dealers be warned: The party may be over. Greed is not the basis of sustainable demand.

The jewelry industry should be prepared for a period of transition as Far East, Indian and Arab markets expand. U.S. retailers should prepare for shifting consumer demand to better price/value products. Brands will have to justify the cost of their unique selling proposition. Lower interest rates will take some pressure off dealers but tighter credit markets will force inventory rationalization.

External economic factors are the primary forces influencing demand amid concern that a U.S. recession is spreading to the Far East. Fortunately, significant jewelry demand is event driven. Birthdays, anniversaries and holidays will persist. The bridal market will remain strong in spite of record-high platinum and gold prices.

In the current environment, firms that strategically add value to their products and focus on growing markets will have opportunity to increase market share. As they say in Hong Kong, “It’s not the winds of change that are important; it’s how you set your sails.”

Global Stock Markets 2007

Stock Markets 2007

SSE 180 China 150%

Sensex India 45%

S&P 500 USA 4%

FTSE All Share UK 0%

Nikkei Japan -15%

US$ Exchange Rate

China Yuan China 5.9%

Indian Rupee India 10.7%

Japanese Yen Japan 6.1%

Euro Euro 10.7%

British Pound UK 1.3%

Article from the Rapaport Magazine - February 2008. To subscribe click here.

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