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The Upside to Low Savings Rate?
Old 03-29-2006, 10:08 PM   #1
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The Upside to Low Savings Rate?

Is our low savings rate a good thing?
By Mark Hulbert, MarketWatch

Numerous columnists over the years have lamented the incredibly low rate of personal saving in this country. Their moaning reached a fever pitch earlier this year, after it was reported that household spending in 2005 exceeded household income for the first time since 1933.

To be sure, now and then a commentator will argue that the picture painted by the savings rate isn't as entirely negative as it otherwise appears to be.

But I never came across someone who actually made a declining savings rate appear to be a good thing.

Until now.

The change came earlier this week when I read a "Strategy Note" prepared byThomas McManus, chief equity strategist at Banc of America Securities. In it, McManus takes issue with Federal Reserve Chairman Ben Bernanke's assertion that an increase in personal savings would be desirable.

"We do not know whether Mr. Bernanke or his staff at the Fed has studied the historical relationship of stock market returns to increases in the savings rate," McManus writes.

But, according to his analysis, "stocks have historically performed well as the savings rate was declining toward a meaningful low point. Afterward, in those instances where the savings rate moved back higher, we found that equity returns were significantly lower than average. So, while Chairman Bernanke may welcome an increase in the pace of savings on behalf of U.S. households even if it were combined with a moderation in housing prices and a weaker wealth effect, this appears to be a recipe for a stock market correction, in our view."
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