- The Washington Times - Friday, May 26, 2000

J.Y. Lee of Herndon, Va., is celebrating his 60th birthday in a special way. His two sons are buying him a new Mercedes-Benz, financed mostly with his eldest son's MCI WorldCom stock options.

"I spent all my time and patience to make good for them, and now they make good for me," said the first-generation South Korean immigrant as he looked over a sleek, silver, $50,000 Mercedes-Benz sedan on a recent day at HBL Inc. of Tysons Corner, Va.

He added that he is a little worried lately about whether his son's cash will be there when they need it to pay for his new car. "MCI WorldCom stock was down 2 percent today."

The Lees are one of thousands of Washington-area families who are cashing in on a stock bonanza that has fattened savings and retirement funds across America and made millionaires out of many ordinary workers.

The strongest bull market in U.S. history hasn't just plumped up the net worth of corporate executives who routinely get stock options. It has raised the average household wealth of American families to record highs and fueled a spending spree on luxury cars, homes, vacations and other big ticket items.

The spending binge has been great for American businesses as well, enabling them to hire millions more workers, post bigger profits, and keep the economy humming for years longer than anyone would have predicted at the beginning of the record-long expansion, which began in 1991.

Economists estimate that as Americans have spent down part of the wealth they have accumulated in the stock market in recent years, that has added about one percentage point to the economic growth rate, enabling the economy to grow faster as well as longer than usual.

"Business has been building steadily," said Larry Mischou, a sales representative at the HBL luxury car dealership. The company gets customers all the time from nearby America Online, whose stock-sharing program has created a number of millionaires.

"When the market goes up and down, that affects us," he said, noting that the dealership missed its target for sales last month. That was possibly because of a big plunge in the Nasdaq Composite Index, and the stock of AOL, MCI WorldCom and other technology companies located nearby.

"Mostly it's been a very good year, though," Mr. Mischou said.

Realtors in the area have a similar story to tell. High-end sales along the Route 66 technology corridor have been booming. With every significant run-up in the market, they reap a harvest of luxury home sales fed by the stock gains technology entrepreneurs are using to make down payments.

But in the past two months, because of Nasdaq's woes, home buyers are learning the hard way that fortunes in the market cut two ways, said Julie F. Hall, an agent with Weichert Realtors in Alexandria, Va.

After the market's plunge wiped out a portion of the stock funds one client had set aside for a $100,000 down payment, he had to scramble to sell $30,000 in personal assets to close the deal, she said.

Economists say such incidents show not only how economic activity is being fueled to an unprecedented extent by the bull run in the stock market, but how it can be shaken by the misfortunes of the market as well. Many say that means the U.S. economy is unusually vulnerable to a severe downturn in the market.

"If a sustained bear stock market occurs, the expansion will end within months," said David A. Levy of the Jerome Levy Economics Institute in Mount Kisco, N.Y. "Few people understand how rapidly the expansion's impressive vigor would vaporize in the aftermath of a bursting of the stock market bubble."

The link between the stock market and consumer spending has not always been so close. After the October 1987 stock market crash, fears that the economy would fall into a recession proved unfounded as consumers most of whom had little at stake in the market largely ignored Wall Street's woes and kept spending.

But today, the number of American households that own stocks has more than doubled to about 50 percent. And small investors are dabbling in the market in ways few did before, thanks to the advent of the Internet and a profusion of discount brokers who offer to process on-line stock transactions for as little as $5 a trade.

"Trading has become much cheaper and easier, creating a new class of investors" who move in and out of the market frequently with the goal of making quick money, said Drew T. Matus, economist with Lehman Brothers in New York.

On-line investors tend to be short-term traders, more like gamblers than the buy-and-hold investors of yesteryear who invested for long-term goals such as college education or retirement, he said.

"Unlike the traditional investors, these investors are likely to celebrate a good month in the market" by going out and spending their gains, he said.

The result has been a dramatically increased link between the ups and downs of the stock market and consumer spending.

Since many of today's on-line investors are enamored of technology stocks, their spending habits correlate most closely to the fluctuations in the Nasdaq index so much so that Lehman economists have documented a "Nasdaq effect" on retail sales.

Lehman estimates that a 10 percent swing in the Nasdaq in any given month adds or subtracts 0.4 percent from the Commerce Department's monthly retail sales report.

Since the Nasdaq has mostly gone up in recent years, it has created ample "windfall wealth" for investors in a good year like 1999, when the index soared by a record 83 percent, Mr. Matus said. But a spill in the Nasdaq, like the one of the past two months, also can take a toll on spending and wealth.

Last month, for example, an 18 percent drop in the Nasdaq caused a 0.7 drop in retail spending as was reflected in an unusually weak retail-sales report for April, he said. The Nasdaq's troubles this month also are likely to hold down spending.

For the most part, though, the long bull market has attracted so many fans that even people who don't have money invested in stocks have been infected by the optimism, Mr. Matus said. Studies show that the market has boosted confidence and spending among the half of Americans who don't own stocks.

Many other Americans own stocks through pension funds or individual retirement accounts and 401(k) retirement accounts, and cannot access those funds easily before retirement. But they too have been increasing spending with the buildup of sizable gains in their accounts, he said.

Because of the stock market's influence over consumer spending, most economists say it will play an important role in the drama now being played out as the Federal Reserve seeks to slow the fast-growing economy with sharply higher interest rates.

Fed Chairman Alan Greenspan has blamed the stock market's "wealth effect" for fueling overheated spending by consumers, and has said that spending must moderate in the future if the nation is to avoid a serious bout of inflation.

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