The Dow Jones Industrial Average is a hair’s breadth from crossing the 17,000 mark. But is that really reason to celebrate? The sentiment on Wall Street may be that our long national fiscal nightmare is finally over, but the stock market is just one barometer of prosperity, many economists and consumer experts argue. And the problems that have plagued the U.S. in recent years — declining household income, surging prices for many key goods and services, low interest rates for savings — remain very much in place, they say.
Add to that the fact that many investors started losing faith in recent years — and went to cash at the very time the market began its bullish run in 2009 — and an equally scary reality emerges: Market milestones may not reflect what many Americans are seeing in their monthly portfolio statements.
The bottom line: We’re still suffering a crisis in confidence — literally. The Consumer Confidence Index, which translates consumer views on the economy into a numerical formula, remains well off its historic highs. Today, the index stands at 85.2. By contrast, during the peak of the dot-com boom in 2000, the index registered as high as 144.7.
The news is not all bad, of course. The unemployment rate, currently at 6.3%, is well below its past-decade high of 10 percent in October 2009. And while consumer prices have climbed since October 2007, they have done so at a fairly modest clip. In the past year, for example, prices have increased by 2%, according to the Bureau of Labor Statistics.
Plus, many savers have seen respectable increases in their retirement portfolios over the past five years. Vanguard, for example, reports that the average 401(k) account balance rose from $56,000 in 2008 to $102,000 in 2013. And even factoring in contributions, Vanguard research analyst Jean Young reports that one study of 401(k) participants, conducted by the firm, showed an average annual return rate of 12.7 percent over the same five-year period. Granted, such a yield is nothing to write home about — by comparison, the Dow was up at least 20 percent in five of the 10 years during the ’90s — but Young adds that it’s a solid figure given the low inflation over the period.
Still, many financial experts say that there’s a reason why the good news doesn’t quite register in the minds of consumers and investors. Call it the Great Disconnect that has followed in the wake of the Great Recession. And it’s a story that experts say can be told in one sobering statistic after another.
Begin with income. On the one hand, wages have basically kept pace with inflation in recent years. But on the other, unemployment and underemployment have affected overall household income to the point that there’s been about a 6 percent dip since March 2009 to the current median figure of $52,959 (after adjusting for inflation), according to Sentier Research, which tracks income. “It’s not a pretty picture,” says Sentier principal John Coder.
And what about expenses? While the Bureau of Labor Statistics may say prices are in check, some consumer watchdogs say what applies to overall prices may not apply to some key expense categories.
Consider the cost of fuel: A gallon of gas went from $2.40 in 2009 to $3.57 in 2013, according to the U.S. Energy Information Administration. Or medical care: The employee’s share of annual premiums for family coverage has increased from $2,412 in 2003 to $4,565 in 2013, according to the Kaiser Family Foundation. Or even a pound of bacon: In just the past year, the price in U.S. cities has increased by 16.4 percent to $5.69, according to the Bureau of Labor Statistics.
But what about stock market returns offsetting some of this economic stress? The relatively good news on the 401(k) side — at least as reported by Vanguard — does not necessarily jibe with the broader reality that many financial advisers say they’re seeing. They say they’re meeting with many first-time clients who have withdrawn large sums from IRA or traditional brokerage accounts during the past few years and have paid the price in missed returns as a result. “Almost everyone coming in to me today has tons of cash,” says Lee Munson, founder of Portfolio LLC, a New Mexico-based investment firm.
And there’s some data to back up those adviser claims: In the five-year period through January 2014, the Investment Company Institute reports, outflows from equity mutual funds outpaced inflows in 30 out of the 60 months — meaning money was being withdrawn from the market at a fairly significant rate.
Of course, at one time, “going to cash” wasn’t so bad. In fact, it’s the way a generation of retirees saw themselves through their golden years, living off CDs and other fixed-income investments that paid respectable yields. But therein lies what many financial experts say is the greatest cause for concern over the past several years. A little more than a decade ago, the interest rate on a five-year CD was well above 5%, according to Bankrate.com; today, savers are lucky if they can get 2%.
It’s a sea change that has shaken the traditional model of retirement planning, says Greg McBride, senior financial analyst of Bankrate.com. “The sharp reversal in interest rates has dramatically cut the buying power of retirees and anyone else dependent on a fixed income,” he says.
Still, McBride says that if someone saving for retirement was smart enough to stick with stocks through the past five years, they may be OK, other economic factors aside. But McBride is just not sure how many investors had the wisdom to do so. “The train may be back at the top of the mountain,” says McBride, “but you’re not there unless you stayed on the train.”
Charles Passy covers personal finance, consumer spending and all things food and drink for MarketWatch in New York. Follow him on Twitter @CharlesPassy. This article originally appeared on MarketWatch.com and is reprinted by permission from Marketwatch.com, ©2014 Dow Jones Co. Inc. All rights reserved.