The resurgent stock market is finally starting to provide some sustenance to Main Street.
The improvement is being felt in everything from college endowment funds to high-end retailers such as Tiffany and Coach. Over the past year, the market has increased about $2.5 trillion in value - much of that in consumers' net worth. Some of this so-called "wealth effect" is translating into more confidence in the economy.
Last week, some state and federal officials indicated they are raising their revenue estimates. And some companies, with their stock prices up, are planning to spend more money, since it's easier to finance their expansion.
"The rising stock market provides a very nice tail wind to the broader economy," says Mark Zandi of Economy.com.
Over the past year, the stock market has recouped about half of what it lost during its three-year stumble. Last week, the market again rose, but was shaken Friday - with the Dow falling 133.55 points - when the Department of Labor reported negligible job gains in December. But Monday, the market started off somewhat higher.
Up to now, the market has been more focused on the surge in corporate earnings, the continual low interest rates, and the improvement in the economy. Many of the investors who have benefited from this focus have been upper-income individuals.
One sign of this was the holiday season. High-end retailers such as Nordstrom and Saks Fifth Avenue are reporting buoyant sales. They point to the stock market as one reason their clients are spending.
Unfortunately, this stock-market-driven optimism has probably not spread to middle America, says Ken Goldstein, an economist at the Conference Board, a business research group. "It assumes the average consumer is still there absorbed by CNBC and what the market did," he says. "I suspect the average person is not."
Instead, he thinks the guilty plea last week by former Enron executive Andrew Fastow and his wife, Lea, will bring back bad memories for many investors.
"At what level of price-to-earnings ratios will the public be comfortable?" he asks.
But many states, and even the federal government, are expecting the stock market's rise to help. During the 1990s, the soaring stock market resulted in much higher tax receipts. Capital gains rose from $153 billion in 1994, peaking at $644 billion in 2000. Fiscal analysts termed the phenomenon "the April surprise."
Unfortunately, the surprise became a disappointment starting in 2001, when capital gains plunged to $345 billion.
Now, the trend may be reversing once again. "The direction of the equity market is clearly positive and welcome news for state policymakers," says Arturo Perez, a fiscal analyst at the National Conference of State Legislators. "If it continues, it would once again prove to be helpful to state finances."
California is an example of how important capital gains are for the economy. By 2000, tax receipts from capital gains and stock options amounted to $45 billion, up from $20 billion only five years earlier.
Last week, Gov. Arnold Schwarzenegger raised his estimates of the state's revenue by $2 billion. "Some of that is based on the strength in the equity markets," says Mr. Perez.
On the national level, Treasury Secretary John Snow said last week that he anticipates higher revenue as the economy recovers. During the Clinton years, government revenues grew faster than computer models predicted.
"That was largely capital gains," says Stanley Collander, a fiscal analyst at Fleishman-Hillard, a public-relations firm in Washington. "But anyone who has bought stocks since 2001 will probably not show a gain for a while."
The resurgent stock market, however, is helping the nation's pension funds, which have done badly. "Last year was the best year since 1998 for pensions," says Mike Clowes, editorial director of Pensions & Investments, a trade publication. "Their funding position is up 18 percent," says Mr. Clowes, adding, "Unfortunately, they are still not out of the woods. On average, the funds are still underfunded."
Many older investors in particular remain wary of the market.
One AARP study found 77 percent of people between the ages of 50 and 70 lost money in the stock market or in mutual funds.
"Those who lost money in stocks had lifestyle changes," says Jules Lichtenstein, a senior policy adviser at AARP. As a result, he says, "it's my sense seniors are still very skeptical about the market."
But for some, the market's improvement is a real savior. That's the case at Berea College, a small Kentucky school that does not charge tuition to its mostly poor students. Two years ago, the bear market had squeezed some $210 million from the school's endowment. The college had little choice but to cut jobs and expenses.
Now, however, the rally in the stock market has brought the endowment back to within $100 million of its old self. Even though the college is still cutting jobs, it is feeling some relief.
"The improvement will make a big difference to us," says Ron Smith, vice president of finance at Berea College. "If the market had moved further south, we would have to cut more people."