The Wealth Effect

AAA

DEFINITION of 'The Wealth Effect'

The premise that when the value of stock portfolios rises due to escalating stock prices, investors feel more comfortable and secure about their wealth, causing them to spend more. For example, economists in 1968 were baffled when a 10% tax hike failed to slow down consumer spending. Later this continued spending was attributed to the wealth effect. While disposable income fell as a result of increased taxes, wealth was rising sharply as the stock market moved up. Undaunted, consumers continued their spending spree.

INVESTOPEDIA EXPLAINS 'The Wealth Effect'

The wealth effect helps to power economies during bull markets. Big gains in people's portfolios can make them feel more secure about their wealth and their spending. However, the relationship between spending and stock market performance is a double-edged sword as poor stock prices in bear markets hurt economic confidence.

RELATED TERMS
  1. Draghi Effect

    The calming effect of European Central Bank President, Mario ...
  2. George Bailey Effect

    A feeling of increased gratefulness for what one has upon considering ...
  3. Hierarchy-Of-Effects Theory

    A hierarchical representation of how advertising influences a ...
  4. Lipstick Effect

    A theory that states that during periods of recession or economic ...
  5. Bandwagon Effect

    A psychological phenomenon whereby people do something primarily ...
  6. Clientele Effect

    The theory that a company's stock price will move according to ...
RELATED FAQS
  1. What effect do stock buybacks have on the economy?

    Stock buybacks have a mildly positive effect on the economy as they lead to rising stock prices. Research has shown that ... Read Full Answer >>
  2. What are some of the key shortcomings of how the U.S. unemployment rate is determined ...

    Each month, the Bureau of Labor Statistics (BLS), a division of the U.S. Department of Labor, announces the unemployment ... Read Full Answer >>
  3. What are key economic growth rates that can be used to determine the economic health ...

    Before you can determine the proper indicators for economic health, you must understand what causes an economy to grow and ... Read Full Answer >>
  4. Why would a country's gross domestic product (GDP) and gross national income (GNI) ...

    A country’s gross domestic product, or GDP, and gross national income, or GNI, are likely to differ considerably because ... Read Full Answer >>
  5. While closely related, how do gross domestic product (GDP) and gross national income ...

    Gross domestic product, or GDP, and gross national income, or GNI, are the two most important economic indicators that measure ... Read Full Answer >>
  6. How does the neoclassical growth theory predict real GDP?

    Neoclassical growth theory predicts real gross domestic product (GDP) through measures of total factor productivity, capital, ... Read Full Answer >>
Related Articles
  1. Insurance

    The Causes And Effects Of Credit Shocks

    These shocks cycle through history. Find out what you need to know to avoid the alarm bells.
  2. Investing Basics

    Portfolio Growth Strategies

    There are many ways to grow a portfolio, and the best approach for a given investor will depend upon various factors.
  3. Investing Basics

    Income, Value and Growth Stocks

    Investors who buy stocks generally seek one of three criteria: undervalued holdings, growth potential or steady income. The characteristics of stocks in each of these categories differs accordingly.
  4. Active Trading Fundamentals

    Capitalizing On Seasonal Effects

    We show you how to take advantage of periodic trends in the equity markets.
  5. Economics

    5 Economic Effects Of Country Liberalization

    Liberalization provides new opportunities for diversification and profit.
  6. Fundamental Analysis

    How To Construct A High-Risk Portfolio

    Over time, intelligent and disciplined risk-seeking behavior can produce substantially above-average returns.
  7. Options & Futures

    January Effect Revives Battered Stocks

    Make sure you buy in low to ride this phenomenon for all it's worth.
  8. Fundamental Analysis

    Lipstick And The Stock Market: Connection?

    We test the theory that lipstick sales thrive during an economic downturn.
  9. Options & Futures

    Terrorism's Effects On Wall Street

    Terrorist activity tends to have a negative impact on the markets. Find out how to take cover.
  10. Retirement

    Economic Indicators To Know

    The economy has a large impact on the market. Learn how to interpret the most important reports.

You May Also Like

Hot Definitions
  1. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  2. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  3. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  4. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  5. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  6. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!