Rich-Poor Optimism Divide Swells On Home, Stock Gains

Investor's Business Daily

Consumer confidence figures show that the split between the highest-income households and everyone else continues to widen rapidly, as home and stock price gains impact sentiment and spending.

The overall Consumer Confidence Index rose half a point in August to 81.5, the Conference Board said Tuesday, better than expected. Those making $50,000 and above shot up 6.6 points to 110.7, the fifth straight increase and the highest level in six years.

During that five-month period, confidence among that group rose 45%, while those making $15,000 or less saw only a 9% increase.

The highest-income households are responding to the rise in home prices, said Millan Mulraine, an analyst with TD Securities in New York. Even if mortgage rates keep rising, Mulraine said he expects the housing recovery, and the corresponding sense of confidence, to continue.

Chris Mier, an analyst with Chicago-based Loop Capital, noted that swings in the S&P 500 index had tracked the divergence between confidence levels in the highest-income bracket and the lowest, those making less than $15,000.

The stock market hit its nadir in March 2009, Mier pointed out, and February 2009 was also the point at which the two groups were closest to each other in terms of confidence.

"As the stock market improved, confidence for the group that was likely to benefit the most also grew," Mier said in an email. "In addition, home values were increasing, which was also likely to benefit the higher-income group more than the others.

Mier also believes the housing recovery is healthy, especially as speculators take a back seat and demand becomes more reflective of fundamentals.

But it will take a while before that sense of confidence reaches the lower-income groups, Mulraine said. "These are the people that live paycheck to paycheck, and an increase in disposable income will translate into confidence.

TD Securities expects unemployment to keep dropping gradually, but there are some near-term head winds. They include the anticipated pullback in Federal Reserve stimulus and the possibility of another battle over the federal debt ceiling.

Stocks, which had already retreated on Fed tapering expectations, sold off hard Tuesday on worries of U.S. military action in Syria. Meanwhile, the S&P/Case-Shiller 20-city index out Tuesday showed home price gains softened slightly in June, the first deceleration in 1 1/2 years.

Higher-end consumer confidence helped boost Tiffany (TIF) earnings above analyst expectations Tuesday, though the jeweler's revenues fell short. "Tiffany's high-end business has been quite vibrant," said Dorothy Lakner, an analyst with Topeka Capital Markets in New York. The segment of Tiffany's business that's lagging is less-pricey fashion jewelry, she added.

Lower-end retailers have reported a mixed bag of results, Lakner said. Wal-Mart Stores (WMT) reported a surprise drop in Q2 U.S. same-store sales. Meanwhile, other luxury retail and product makers, such as Michael Kors (KORS) and Tesla (TSLA), have enjoyed tremendous growth.

"The ball is in the affluent consumers' park — the market's been pretty good and home prices are higher," Lakner said. "The affluent consumer is not making a choice between, 'I'll buy a home so I can't buy a present for my wife.'"

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