By Avi Krawitz, Jan. 2, 2016.
As the U.S. stocks hit record levels over the Christmas shopping period, the diamond industry should be questioning the impact their continued rise, or possible correction, might have on consumer spending.
Diamond jewelry sales seem poised for growth as stock markets rallied to record levels at the end of 2016. After all, how wealthy consumers feel can determine the extent to which they will buy luxury products, and jewelry in particular.
The wealth effect has always played an important role in encouraging the development of diamond jewelry demand. Consumers might buy more or less expensive diamond jewelry based on how wealthy they feel they are today.
Therefore, the timing couldn’t have been better for the diamond trade as the Dow Jones Industrial Average raced to an all-time high in the middle of the important Christmas shopping season. The index grew 13 percent for the year.
Stocks rose due to strong expectations for the coming year, rather than because of buoyant current conditions. As equity markets tend to be a barometer of confidence in the future, it’s little wonder President-Elect Donald Trump took the stock surge as an endorsement of his proposed policies.
He tweeted: “The world was gloomy before I won – there was no hope. Now the market is up nearly 10% and Christmas spending is over a trillion dollars!”
Agree with him or not, consumer confidence rose to a 15-year high in December, according to the Conference Board’s benchmark index, in expectation Trump will reduce taxes and create jobs.
That was enough to counter the negative effect political transition usually brings to the markets, while the Federal Reserve’s decision to raise interest rates should also have had a dampening influence on stocks.
The Fed announced a rate increase of 0.25 percent in December, with chair Janet Yellen indicating three additional hikes are planned for 2017. Stock markets have soared in the past eight years of near-zero interest rates as people sought out value which the banks couldn’t provide. As interest rates start to rise, one would expect investors to shift away from riskier investments such as stocks. Yet markets continued to rally in December.
That should bode well for the diamond trade, at least it should have over Christmas, and we’ll have a better idea how jewelry fared this holiday when results are published later in January.
But with the season over, the question on everyone’s mind is if the market will continue to rise, pushing the Dow beyond its 20,000 point barrier, or if it is overvalued and due for a correction.
At the start of 2017, we should be asking ourselves:
• How sensitive is diamond demand and diamond prices to changes in the stock market?
• Is the diamond industry currently at risk due to a potential stock-market bubble?
• How should the diamond industry deal with the challenges presented by potentially volatile stock markets?
• How do consumers relate to their equity wealth and what impact does this have on diamond demand?
In general, the diamond industry should watch developments in the stock market carefully, especially segments that specialize in larger, more expensive diamonds. However, barring a major collapse substantial enough to damage the overall economy, fears that stock-market volatility will significantly harm diamond demand in the short term are probably overstated.
The real challenge is to extend our analysis beyond the impact of short-term market fluctuations to gain an understanding of the primary economic forces that could directly influence diamond demand.
For example, we must consider the impact a strong dollar is having on the trade, whether Chinese confidence has returned, the influence India’s demonetization policy will have on liquidity, if political instability in Europe will linger, and whether the oil economies will rebound in 2017.
That’s the context in which we begin the year. There certainly are a fair amount of challenges for the industry to contend with. But if stock markets are trying to tell us something about the future, the industry might take some encouragement from the rally of 2016.