There is a noticeable disconnect between Wall Street and Main Street and nowhere is it clearer than in discussions of the wealth effect supposedly generated by the rise of the stock market. To Wall Street and the financial press that services it, yes, the rise in stock prices is significant. Fortunes are made and lost. But to Main Street the story is much different. Here are some reasons I think we misunderstand the role of the stock market in fueling the economic growth.

While the share of households in the U.S. that owns stock in some form or other has risen to about 48%, it is important to remember that more than half the population isn't participating in the stock market's captivating rally. And most of those that own shares have relatively small amounts. It is not until household income rises above $100,000 (as measured in 1995 dollars), that median holdings rise above $10,000.

That expansion of stock ownership has not precluded increased concentration of stock ownership. The amount of stock owned by the wealthiest 5% of U.S. households rose over the past decade. The wealthiest 10% of American households account for nearly 90% of all equity ownership. These households typically have a higher propensity to save in the first place.

The growth of equity ownership has coincided with a rise in mutual fund retirement accounts. Stocks held in such accounts rose to about a third from around a fifth of household equity holdings. Although under certain conditions, one can borrow against an

Individual Retirement Account



investments, the tax and penalties associated with early withdrawal discourages "breaking" into one's nest egg.

Studies based on interviews and surveys find that a vast majority of respondents say the trend in stock prices does not impact their savings or spending patterns. Yet we know that consumption is very strong -- up 5.5% last year. At the same time, a staff economist at the

Federal Reserve

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recently found that rising stock prices boosted sentiment among those consumers who don't own stock as well as those who do. This suggests consumers use the stock market to anticipate future employment and income opportunities, which are reflected in their spending behavior.

The stock market is an important source of investment capital and is an important determinant of the cost of capital. The rise in share prices leads to a commensurate decline in the cost of capital. This in turn has helped fuel a rise in business fixed investment, which was up 7% last year. This investment helps boost productivity, which, coupled with the growth of the labor force, sets the upper speed limit on the U.S. economy.

Regardless of the


's sharp run up last year and thus far this year, most stocks are not participating in the bull market. The performance of the Nasdaq, up 86% last year, overstates what most mutual funds handed back, which might help to explain the growing popularity of index funds.

More American households own their homes than own stock. Around 68% of American households own their homes. The appreciation of house prices and the ability to draw on those gains through a variety of products and tax-incentives may also be encouraging household spending.

Understanding household investment and spending patterns within the context of their life cycles suggests there would be only a modest effect on current spending from the wealth gains associated with the stock market. Gains in spending are more likely to be distributed over a household's lifetime. It is wrong to assume that a typical equity-investing household has the time-horizon of a daytrader or other individuals that may "play" the market.

The real source of the wealth effect in the U.S. is the incredible number of jobs created in recent years. Just look at the past four years: In 1996, 2.8 million jobs were created; in 1997, 3.4 million jobs; in 1998, 2.9 million jobs; and last year, 2.7 million jobs.

Even making conservative assumptions about the pay of these jobs, the spending power and wealth created by them are responsible for the high levels of confidence, income, and consumer spending.

Marc Chandler is the chief currency strategist for Mellon Bank. At the time of publication, he held no positions in the currencies or instruments discussed in this column, although holdings can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at