European Stars And Stripes (Newspaper) - March 23, 1986, Darmstadt, Hesse                                Sunday March 23, 1986 the stars and stripes Page 19 wealth effect cheers . Investors new York not soaring Stock prices since the end of september have been making millions of americans wealthier at least on paper. In an extraordinary burst the value of All publicly traded stocks has jumped by More than $450 billion in that Span giving added zip to the Economy As Many investors have begun to spend More freely than before. I decided to Knock out a Wall and re Model my apartment a few months ago said Edwin Arnold As he watched the prices on an electronic Board at the mid town new York offices of Charles Schwab & co., a discount broker. A couple of months ago when the mar Ket kept going up i decided to redo the Kitchen  Al Wyman a business machine Salesman pondered trading up to a Cadillac when he replaces his car this Spring. In economic parlance these new York ers Are feeling the wealth  economists disagree Over exactly How to measure it but study after study has reached the conclusion that big advances in the Stock markets Lead to jumps in consumer spend ing. Most studies conclude that Between 3 and 9 percent of the gains accumulated in a Bull Market get translated into additional spending. The wealth effect sometimes called the Ligou effect after . Ligou one of the first economists to write about it is expected to bolster consumer spending by anything from $13 billion to $40 billion Over the next year. That assumes the advanced Market valuations will remain in place. Not All the increased spending is based on profits taken out of the Stock Market. In fact if too Many investors tried to Cash in their gains the Market would plunge and eliminate a lot of the increased value. How quickly the gains can diminish has been seen As the Stock run up falters a bit and the value of All stocks decline. But despite the gyrations Many analysts believe that the Outlook for cheap Oil and continued Low inflation will keep stocks trading at High Levels at least for several More months. But the average investor feels Richer when his or her portfolio is Worth More. That creates a sense of Well being which encourages greater spending. It May Lead investors to withdraw funds from savings borrow against the increased value of their stocks or sell some of the shares. The Impact of rising Stock prices has been compounded by an equally dynamic run up in Bond prices. The value of Bonds held by Consumers excluding savings Bonds Rose roughly $90 billion last year Bond prices Are up about 12 Points or $110 per $1,000 Bond since feb. 7. Rally is not a Good word to describe what we be been seeing said Norman Robertson chief economist at the Mellon Bank in Pittsburgh it s been a  the individual investor 50% 40 20 10 0 to i a in percent of total transactions Stock transactions fewer than 900 shares common Stock investment by individual households 1973 74 75 76 77 78 79 80 81 82 83 note the Stock transactions Are for april of each year the common Stock investments Are annual averages exuding Mutual funds Chicago Tribune graphic sources new York Stock Exchange Federal Reserve Board the Sharp Rise in the Stock and Bond markets influences business behaviour As Well As Consumers. Typically corporations Issue new Bonds in order to retire previously issued notes or Loans on which they Are paying higher interest rates. Many also come to the Stock Market with new share offerings. The new equity in businesses reduces the Overall level of debt leaving room for further investment and expansion. The More the rally goes on the More Booster rockets Are behind the Economy said Lawrence k. Kudlow president of Rodman & Renshaw economics inc., a Washington based consulting firm. Kud Low whose predictions for economic growth this year were among the More optimistic offered by economists said that the wealth creating Impact of the continued surge in Stock and Bond prices this year now made it Likely that Strong growth would continue into 1987. The wealth effect has a Strong psychological dimension. The wealth created by the Rise in equity and Bond prices makes investors feel both Richer and More confident about the future whether or not they Actu ally sell some of their shares to take the profits generated by rising prices. If i want to go out to dinner these Days i go ahead and do it without really thinking about it said Paul West co owner of Golan heating and ventilating a Small san Francisco contractor. It does t really make sense because my investments Are in iras so 1 can t get the Money out before retirement without a big tax  the subjective nature of the psychological Impact of the wealth effect on Consumers is one of the things that makes it difficult to measure. Some economists believe that it is largely the nation s upper crust that feels it. They Are not surprised to hear that sales Are booming at the Carriage House manhat Tan s Rolls Royce Dealership but they doubt that rising Stock markets affect the average Patron of Mcdonald s. The Stock Market s gains probably Don t Lead to people eating Steak instead of Ham Burger said Walter Dolde an economist at Shearson Lehman Brothers inc. They do Lead to someone taking a week s vacation in Europe instead of Las vegas or adding a second week to their vegas  but others believe the Impact is very Road. Over 51 percent of households own Stock and participation in the Market has been increasing said Jason Benderly co director of economic research at Goldman Sachs & co. He referred to direct Stock investment As Well As indirect investment through Mutual funds. There s evidence that the Bull Market has a general psycho logical effect that influences people whether or not they have  securities salesmen say they Sec few Indi cations that investors Are actually cashing in on their new wealth by taking profits and quitting the Market. My gut reaction is that most people in the Market Are using the wealth to buy More shares said Stephen Leightman the National sales manager for Prudential Bache securities inc. People Are feeling better about invest ments agreed Jerry p. Gettinger head of Bache s Beverly Hills office. They re much More receptive to suggestions from our Industry. The scepticism level is Way  but some analysts feel that there is still a Long Way to go. Between 25 and 30 percent of household assets were invested in stocks when the Bull Market began in August 1982, compared with 45 percent in the late 1960s, according to Marshall front senior partner at the Chicago based investment management firm of Stein Roe & Farn Ham. For that reason front believes that an unusually Large percentage of the wealth created by the Bull Market will remain in vested in equities thereby reducing the Impact on consumer spending. Some economists and analysts argue that income flow is a better guide to consumer behaviour than wealth accumulation. That Point of View leads Albert e. Sindlinger who has tracked consumer Confidence in Stock markets for More than three decades to a contrary stance on the Impact of the past year s surge in Stock and Bond prices. Clients Are telling me that the value of their Stock is up but their Cash flow is Down Sindlinger said. When High inter est Long term paper comes due people can t find similarly High yielding invest ments because interest rates Are Down so they actually have less Money in  but views like Sindlinger s Are few and far Between. Economists Are generally confident that the wealth effect is real and contributing to economic growth. Investor agree. I did t know it had a name but it s certainly affecting my life a Young Busi Nessman said As he hurried away from the Charles Schwab office. He declined to give his name but said with a Grin i bought a fishing  investor s guide Stock pulse United press International copyright 1986 Friday March 23 nose composite most actives by volume Slock div vol close earns be old at to 8,821,300 22% $ 1.37 17.0 5.3 cowl de 4,376,700 33va 4.45 8.0 9.0 Detels 2,627,100 17% 2.33 8.0 9.5 ism 2,273,800 149 10.67 14.0 3.0 my do Tull 2,269,100 12 /2 2.01 6.0 14.3 Johns no 2,223,300 54 /4 3.36 16.0 2.4 Philllp set 2,208,800 10 1.44 7.0 10.0 Gen Star 2,043,500 40 /4 3.4 Morgn Stul 1,932,200 71 /4 genl Mot 1,931,200 83% 12.28 7.0 6.0 amex composite largest net changes Stock stash Pitt Way Fla Rock Ich anytime Imp of Green Bros Rogers Forest b Forest a close Cage earns be old 89 of 7 $ 6.76 13.0 18.5 92 61va 3% 68% 3% 60 3 35 2 a 33 2 a 24 a 2 29 2 29 4-2 6.78 14.0 5.23 12.0 5.77 12.0 2.90 21.0 1.65 20.0 0.93 26.0 0.58 50.0 0.57 51.0 2.0 1.5 1.0 4.6 0.5 0.6 1.0 nose composite largest net changes Stock close Cage earns be old Capiti 225vz 8 a $10.87 21.0 0.1 Dunbar do 103 7% 3.88 27.0 2.1 Gen Star 40 /4 6 34 Texas inst 124 5 i 1.6 celanese 193 5 a 13.70 14.0 2.5 merc is 97 5v 6.95 14.0 1.3 Alt mgr 133 /4 5vb 4.9027.0 03 Merck 161 / 4% 7.5821.0 22 Philipm 119v4 4 /4 10.1512.0 39 Dlo ital Erpf 153% 4 i 6.54 24.0 amex composite most actives by volume Stock div vol close earns be old Wickes 2,565,000 6 /4 $ 0.11 57.0 key pharm 930,500 16 a wangle 824,800 19% 0.8 Bat 715,600 5% 0.66 9.0 2.5 dome Petro 626,400 19-16 Lormar Tel 576,300 23% Texas air 533,100 28 /4 2.49 11.0 Johns in 358,800 7% 0.69 11.0 3.8 com bin 300,600 16 /4 0.7 Ste rugs 295,600 15% 0.61 26.0 0.6 be Price to earnings ratio old dividend yield def deficit St yield in Stock earnings latest 12 months unaudited by William a. Doyle q. I retired in 1984 at age 62 and received a Lump sum. Pension settlement. My tax was prepared by an accountant who considered using three year income averaging but said it was not advantageous. Is the 10-year averaging you mentioned something new for 1985, or could i have used it a. It s not new you could have used it and most Likely should have done so unless you preferred to put that Lump sum pension settlement into a rollover individual retirement account. The three year income averaging is an entirely different thing. That tactic can save tax dollars for anyone whose income from any source rises sharply in any year. Three year income averaging could also bite the dust if the Federal tax revision Bill is enacted into Law. Q. My wife and i Are both 63 and recently retired. Together we have $100,000 from Lump sum distribution of our companies pen Sion plans and plan to Roll it Over into individual retirement accounts within 60 Days. I favor having our iras in the Stock mar Ket from All indications Stock prices will remain High for at least six months to a year. I m not interested in Stock growth just Good dividends to supplement our social Security benefits. Our Bank offers a discount broker age service but i m not sure about it being of with Uncle Sam. How do we buy Stock Sand stay within Ira guidelines a. By establishing what s called a self directed Ira. In that Type of Ira you can buy and sell stocks Bonds and a wide variety of other investments. You can set up a self directed Ira at almost any securities brokerage firm including discount brokerages. Your Bank s discount brokerage service probably can handle it for you. Just be sure you do open your rollover iras within 60 Days after receiving the Lump sum distributions from the retirement plans. That will keep the $100,000 sheltered from Federal income tax. Now for  of warning. You will take on risk if you put All that Money into stocks. The indications you cite about Stock prices remaining High might not pan out. Stock prices can fall As Well As Rise. If you re determined to have stocks in your iras my advice is put a cautious toe m the water Don t plunge in. Keep most of your Money in Bonds and or a Money mar Ket Mutual fund which you can have in self directed iras. King features columnist Dovle welcomes written questions but he can provide answers Only through the column. You can write to him in care of the stars and stripes Apo 09211, . Forces c King features Syndicate inc