The recent stock market rally apparently was fueled in part by the return of average investors who fled from equities after the crash of 2008. If that is a sign that households are starting to increase the rate at which they set aside and save money, it would be a trend worth cheering.
The savings rate in the United States dropped precipitously in the last two years, for reasons analysts struggle to explain. In 2010, Americans saved an average of 5.3 percent of their income. The rate dropped to 3.5 percent last year, but might now be on the rise as people are enticed by the prospect of better returns on their investments, particularly in 401K and IRA accounts.
A positive development, but one that comes with some caution signs. First, volatility in the securities markets has abated, but is not vanquished. The economy remains relatively weak, and uncertainty persists over domestic fiscal policy and the stability of foreign economies. Actions by the Federal Reserve to keep interest rates at historic lows have been of short-term benefit to the markets, but how the Fed eventually moves away from that posture will greatly affect future market bearings.
Second, a stampede into stocks based on the expectation of big returns forebodes the fomenting of another boom mentality, which inevitably would meet with a sizeable correction, if not a bust. We've seen this movie before.
The so-called dot-com boom in the 1990s propelled the markets so high so fast, people quit jobs to become day-traders. The housing boom a few years later saw values rise at a pace that tempted people to quit jobs to become realtors or to flip homes in search of giant windfalls. In both cases, the markets turned sharply and for those who jumped in with both feet, things didn't work out so well.
Now, tempered by the lessons of the recent past, we may be seeing a more prudent approach to putting savings to work. If so, it would mark a dramatic attitude change.
Some historical perspective: in the 1960s, people saved an average of 8 percent of their earnings. In the 1970s, the rate reached 11 percent. In the 1980s, it hovered around 10 percent. The savers of that generation were the children of those who lived through the Great Depression, who imbued lessons of frugality and preparation. The following generation is not so imbued, and the savings rate for the average household has declined by half, or more.
The market plunge five years ago made things worse. It took a quantitative toll on retirement accounts and a qualitative toll on investor confidence. The recent resurgence back to pre-2008 levels and slightly beyond is tempting many of those who withdrew to get back in, but it appears they are doing so in tip-toe fashion, not head first. That's a good sign.
Sensible participation in a stable market could go a long way toward reversing a trend in personal savings that, if it continues, could leave an entire generation unprepared to exit the work force and move into retirement. In the big picture, it's less important whether people put their money in the stock market or somewhere else. What matters more is they recognize the value of setting aside adequate savings as an investment in their own future well-being.