When Hinsdale resident Jan Petty picked up her mail recently after an extended out-of-town business trip, one of the first envelopes she opened was an account statement from her broker.
“I was sitting at the kitchen table, and when I saw how much it had gone up, I thought, `Oh good, this is so good,’ ” she said.
“How much was the increase? Substantial.”
Petty, a partner in a development consulting company, is hardly alone.
Anyone with a stake in the stock market should feel more than spiritually richer this holiday season; they should feel just plain richer. Deliciously richer. Investors haven’t profited as much from their stock investments in almost two decades.
Investors in stocks traded on the three major U.S. stock markets–New York Stock Exchange, Nasdaq and American Stock Exchange–added a whopping $1.89 trillion to their collective wealth this year, as of Nov. 30, according to Ibbotson Associates, a Chicago-based investment consulting firm.
That’s about three times as much as Americans lost in stock investments on just the New York Stock Exchange during the memorable month of the October 1987 crash, Ibbotson said.
The Dow Jones industrial average rose 33 percent this year; the broader Standard & Poors 500 stock index, 34 percent; and the technology-rich Nasdaq composite index, 40 percent.
And it’s no longer a select group of the American public benefiting from the stock market gains.
Thanks largely to the growing popularity of self-directed 401(k) or other retirement plans and the rapid growth in mutual funds, almost one-third of American households shared in 1995’s bull market. That’s twice as many as in 1975, the last time that the stock market surged the way it has done this year.
Put another way, individuals and families held $34.4 billion in mutual funds and $453.5 billion in directly held stock back in 1975. By the end of last June, U.S. households owned $1.14 trillion in mutual funds and $3.7 trillion in stocks.
But as joyous as today’s investors are, many seem to understand that this year’s stock market blessings are made of paper, not cash.
While some carefree souls will take their gains to a luxury auto showroom, many other wise men and women appear to be quietly tallying their results, and keeping their fingers crossed that their profits won’t disappear into the night like Santa Claus.
Petty’s pleasure, for example, is mixed with trepidation over what the new year might bring.
Rather than feeling just rich, she’s given her broker the OK to “rebalance” her portfolio, to move some of the money into more conservative accounts to safeguard her gains.
“There’s got to be a correction,” she said.
Investors are happy with their 1995 returns, but also are “waiting for a backlash,” said Derek Sasveld, a consultant at Ibbotson.
For many investors, euphoria over seeing their investments shoot upward has been tempered by the realization that this year’s bull market has been fueled by corporate profits arising from the belt-tightening that has swept Corporate America.
So while their investments are headed up, their jobs also may be on the line.
“If their company isn’t laying off now, they wonder, is it going to come around to them?” said Armond Dinverno, a financial planner in Oak Brook. “They’re not feeling like they just won at the racetrack and can go out and spend.”
One Chicago-area woman in her mid-50s who has worked almost 15 years for the same food company is coping with that double-edged sword.
The value of her 401(k) program rose from $40,000 at the beginning of 1995 to $50,000 at the end of the third quarter. But her company has recently been sold, and fellow workers are being laid off weekly. She has no idea whether she will be kept on.
“Let’s just say that I was really surprised at how much my 401(k) had gone up, but I can’t really get too excited about it right now. The uncertainty of my job offsets everything else,” she said.
Even if her job remains secure, she’s not about to go out and start spending.
“I don’t want to be in the poorhouse when I get older,” she said. “I would like to have an easy retirement.”
Retirement looms in the minds of many investors. Baby Boomers are aging, and increasingly look to their investments as the key to a comfortable old age, rather than a means to fund a spending spree.
“As the population gets older, wealth is no longer discretionary,” said Susan Stern, president of Economic Analysis Associates in Greenwich, Conn. “If the population is approaching 45 years of age, versus 25, people have to sit down and calculate how much money they will need 20 years down the road for retirement. At 23, it didn’t matter so much,” she said.
For those at the cusp of retirement, this year’s bull market is even more critical.
John Kranz, a systems analyst in the western suburbs, would like to retire when he turns 62 next August.
“So the market has a real big meaning for me at this point,” he said. “When I was younger, I knew it was going to fluctuate and I could just wait it out. Now, it affects my retirement plans. We (he and his wife) like what’s happened this year.”
Similarly, David Donaldson, who heads a Tinley Park company that represents sporting-goods manufacturing firms, points to his age–56–and says he’s taking more precautions against a drop in the market than he did before the October 1987 crash.
“That drop was catastrophic, a major hit, but I was still at an age where I could wait it out,” he said.
“I’m delighted the market hit 5000 this year,” he added, referring to the Dow average’s cracking that millenial milestone last month. “But I’m taking a lot of protective measures. I won’t get caught losing much if the market goes down. And I’m more diversified. I don’t want to get caught losing a lot of what we’ve gained. I don’t have as much time to rebuild anymore.”
Chicagoan Diane Lans, a real estate financial analyst, is only 31, but she puts 10 percent of her salary in a company 401(k) plan, and invests an additional amount in various mutual funds.
“I view my 401(k) as long-term retirement, I wouldn’t think of touching that,” she said. “Seeing that go up has certainly given me an extra sense of security, even though I know the market is overvalued and can come crashing down.
“The other, personal, money–well, I have a different feeling about that. I’m thinking, well, gee, maybe I could upgrade my condo for a house, something like that.”
Even given the obvious caution, however, some economists point to a tangible “wealth effect” created in a year full of riches from stock investments, such as 1995. Joel Prakken, an economist at Laurence H. Meyer & Associates in St. Louis, said he expects that American consumers will have spent $20 billion more in 1995 on themselves than they would have if the stock market had brought only average returns.
His estimates are based on an economic model that holds, essentially, that for every $1 an individual’s stock holding rises in one economic quarter, that person will spend an extra 2 cents. If their market gains hold firm for more than a year, this investor feels comfortable enough to spend 4 cents of every dollar gain, he said.
Asked if people really feel comfortable spending so-called “paper” gains, he replied:
“It’s not a question of whether it’s paper or not. It’s definitely there. I could go sell my stocks now and walk away with it. But the real question is, do people expect it to stay?” Prakken said.
“Before they go out and start spending more, they have to convince themselves the stock market isn’t going to go down by the same amount it went up,” he said.
Pat Higgins, senior vice president with the public relations firm Marcy Monyak in Chicago, looked at what the market has done this year and decided it was time to buy that beach house on the East Coast she had always wanted.
“The fact that my investments did so well this year enabled me to make the decision that this was the time to do it,” she said.
“I’m conservative. I would never go out and just start spending. Besides, I’m saving for (her daughter’s) education. But the time was right. I close Jan. 15.”
One good year in the stock market–no matter how good–isn’t likely to change a person’s economic status drastically.
“People don’t live off wealth, they live off wage growth, and wages have been growing slowly,” said Susan Stern, of Economic Analysis Associates. Americans as a group also are carrying heavy debt loads.
“A good year in the stock market isn’t going to erase that.”
