September 24, 2013 Update

DJIA:15,401 S&P 500:1,702 NASDAQ:3,765 Gold:$1,314 Oil:$103.21 EURO:$1.35 YEN:98.80

Insecurity: The Liability Resilient to Market Forces 

Human beings are visual animals who place significant trust in their sense of sight. They were raised to believe in things they can see and ask for proof during times of uncertainty. And because of the complexities of the human brain, many people see, or perceive, their realities in ways that may not be wholly accurate, causing them to behave and consume in an irrational manner. The luxury consumer market is an industry that has created value based off people’s perceptions of themselves and their visual conceptions of worth. The industry represents a level of affluence and social status that people have been chasing since the beginning of civilization. People have always held some insecurities about their wealth and social status, and a luxury item has always been a symbol of social superiority. At one time, the industry’s growth was dependent on the ability of the rich to spend freely since it’s a market that carters to people who believe they can buy without constraint. Fortunately for luxury retailers, the economy has changed. The increased access to and the expansion of cheap credit has caused people’s pockets to seem heavier than they really are, which has altered the perception of personal wealth and disposable income. The rich are no longer the main driver of growth in the luxury goods market. Demand of luxury goods from “aspirational” customers now accounts for more than 60% of the market (Bernstein Research). And according to a recent study by Empathica, 25% and 38% of the demand for high-end items now comes from households who earn less than $30k a year and from students who have no income and a negative net-worth, respectively. As median income stagnates and wealth inequalities grow, it seems to me that people are becoming increasingly insecure about their financial situation and social status. The economy is facing a variety of exogenous pressures, which are sending mix messages to consumers who are looking for a way to climb the social ladder. Consumers are willing to pay hundreds of dollars for a name brand good they can find elsewhere for much less; and despite even the wealthiest of financial situations, I find that type of behavior to be irrational. And I posit consumers continue to spend irrationally not because they associate the name brand with better quality item, but because the name serves as a visual key that leads to the association of high society and the life of the high net worth individual that the industry markets to. People are looking for visual proof of their own social mobility as wealth inequalities become more obvious in modern society. A third of customers who bought a luxury good did so as a personal “reward” for doing something they were felt needed rewarding. Only 11% of consumers indulged in a luxury item because they “had extra money to spend.” With interest rates as low as they are, the temptation to save is not as strong as it is to spend. The rapid expansion of credit has allowed people to mask their insecurities about social status with irrational purchases of luxury goods that make them appear and feel “richer” than they really are. The global recession largely bypassed the market for luxury items, since demand in Asia compensated for the weakened west. And I argue that this is not only because the rich are recession proof, but because insecurity is resilient to irrational behavior and, therefore, resilient to market forces. People will buy expensive things to “reward” themselves even if they have a negative net-worth and no income because they want to feel as though they're recession proof, too. Luxury goods play the same societal role today as they did during feudalism in the 9th century. As the economy shows misleading signs of recovery, I believe the market for luxurious feel-good items will continue to grow as people look for visual proof to mask uncertainties of their own post-recession success.  

Domestic News

• Market Update Futures are down as concerns over the debt-ceiling mount, ahead of economic data.
• The S&P/Case-Chiller and the Federal Housing Finance Agency will release data on July homes at 9am, which are expected to show the market straightening and home prices rising. 

International Updates

Asia

• Market Update Markets are mostly lower as downbeat news about telecoms in Hong Kong set the market mood. 

Europe

• Market Update Markets are inching higher after the German business confidence index rose unexpectedly in September, the FTSE 100 rebounded as gains in the bank&oil sector offset losses in the mining industry.